Financial Market Research and Analysis

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FTSE rebounds after recent weakness

A weaker yen has given a boost to Japanese equities. Much of this strengthening can be attributed to comments from Japan’s finance minister Aso who stated that rapid FX moves were not desirable and that Japan may have to intervene.

Yet the optimism is a little less apparent in Chinese and Australian stocks. Shanghai’s Composite traded in the red – its lowest level since March 15th.
Copper futures dropped by more than 1.50%, nickel futures tumbled by more than 2%, iron ore fell 1.80% on weak demand from China. Strong exports led to a larger than expected Chinese trade balance in April. The customs bureau reported a $45.56B trade surplus compared to $38.4B expected. Exports fell 1.8% versus April 2015 in US dollar terms; economists were forecasting something between a flat reading and a 3.0% decline.

Oil opened under pressure as well after Saudi said they would maintain their oil production unless Iran agrees to cooperate. WTI saw its gains limited but the spreading fire in Canada has so far secured the $45 on the downside.
The US jobs data missed expectations with 160’000 nonfarm jobs added during last month. This has been the weakest monthly job creation since September 2015. The unemployment rate remained stable at 5% but wages grew at a faster-than-expected speed of 2.5% y/y. The US dollar index shortly spiked below the 93 mark after the labour data on Friday yet has quickly recovered to climb to a fresh one-week high. Federal Reserve (Fed)’s Dudley said it would be ‘reasonable to expect two rate hikes’ from the Fed this year. Although the possibility of a June hike is allegedly kept on the table, the conviction is little given the fragile state of the world economy, the market expectations are being pushed back to September.
Eurogroup meetings kick off today. Greece will again be in focus regarding its debt sustainability and whether or not the IMF will step in to help Greece in reaching its fiscal target. The real deadline is the end of July as the country is due to pay the ECB approximately 3 billion euros back in debt and interest payments. While clearly too early to talk about a potential default, if it is the case, we could expect another period of larger core-periphery spreads, increased volatility in Eurozone assets and renewed headwinds. Although the contagion effect is expected to remain limited, although we note some slight elevation in the likes of Spanish and Italian debt yields this morning.
Sterling traders will be dealing with a busy economic calendar this week. The Bank of England (BoE) is highly likely to warn of increased macroeconomic risks both due to a global slowdown and the upcoming Brexit vote, hence could soften its inflation and growth forecasts in its Quarterly Inflation Report (QIR). Risks are on the downside. The pound presently trades at a 2 week low against the dollar as short sterling yields drop in anticipation of a risk-event filled week. The BoE has asked banks to prepare for potential rate cuts should Britain leave the EU. This is not unexpected – and may in fact occur either way.

Ex divs to trim points off the FTSE today (Intercontinental and Croda Intl). Miners are once again lagging on the back of weaker commodity prices.

Intercontinental Hotels (-16%) has been hit by a dive from the oil price and a wave of new competition in London. Growth in global revenues per room cooled to 1.5% in the first quarter, from 2.4% in the previous three months. Cut to neutral v buy at Oddo today

EasyJet (+2.33%) raised to buy at RBC ahead of H1 results tomorrow

Smith & Nephew (+1.58%) Raised to buy at Jeffries.| European Healthcare sector raised form underweight at Bernstein.

TUI (+1.6%) Deutsche Bank has now set a ‘Buy’ rating on shares of TUI AG with a price target of 1320.

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