Financial market research and analysis

Confidence in Europe, despite Frexit

Markets were cautiously optimistic at the start of a week that will see the first Humphrey Hawkins testimony by Federal Reserve Chair Janet Yellen in the Trump era.

European stocks cast off ‘Frexit’ fears to reach the highest in a year. The Euro Stoxx 600 index hit a 12-month high. So far election anxiety has only been showing up in the bond market, where the spread between the yields on French and the relatively safer German debt has blown out. For the time being European equity investors are turning the other cheek to political risk and putting their faith in improved economic and earnings growth.

The FTSE 100 as well as the US stock indices including the Dow and Nasdaq have already notched up multiple record highs this year but the German benchmark DAX index has lagged behind. We think the positive momentum in global equities will likely carry the DAX above its previous record close of 12,374 reached in April 2015.

UK mid-caps in demand as project fear subsides

Fresh multi-year highs in industrial metals sent mining company shares higher, offering some relief to a lacklustre UK equity market.  The FTSE 250 chalked up another intraday record high led my mining firms Ferrexpo and Evraz. The return to form of the FTSE 250 is the unravelling of project fear in its plainest form. 

PM Theresa May’s more transparent approach to Brexit has seen the pound stabilise and investors rotate out of multinational shares and back into more UK-focused companies. Of course, there are still many big firms with large foreign operations in the FTSE 250. On Monday Fidessa was a top riser after reporting 12% profit gains, or 3% excluding the benefits of a weaker pound.

RBS job losses celebrated

Shares of Royal Bank of Scotland rose on Monday The unfortunate stock market formula of ‘job cuts equals buy the shares’ was in play. Talk of plans to cut costs by £800m at the banks sent shares higher in the lead up to its fourth quarter earnings report at the end of the month. Reports suggest the latest cost cutting could mean 15,000 jobs getting axed.

The popularity of online banking means banks are aiming to close branches, meaning job losses anyway. RBS has the additional burden of making good its $3.8bn fine for mis-selling mortgage-backed securities in the US, not to mention getting itself into a position where the government can unload its majority stake.

Steve Mnuchin steps up to Treasury plate

Shares on Wall Street opened at fresh record highs on Monday. Investors are pricing in the benefits of a Goldman Sachs-led Treasury Department. Steve Mnuchin is in the final hours of his confirmation as Treasury secretary. He is expected to be confirmed around 7pm EST Monday. Donald Trump’s agenda of financial deregulation will likely have another supporter in the form Mnuchin. Mnuchin and Gary Cohn will be a more ‘internationalist’ influence on Trump, potentially putting a lid the President’s penchant for currency wars and trade tariffs.

The benefit to Wall Street of having an ex-Goldman Sachs banker as Treasury Secretary is pretty self-evident. In extension, it would make sense for Mnuchin to fill key positions at the treasury with his people, namely other Wall Streeters. Senior Goldman Sachs banker Jim Donovan as well as Justin Muzinich, a former Morgan Stanley worker are reportedly being considered for key positions.

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