There was a more risk-off tone to markets on Monday. Traditional havens including gold, the Japanese yen and the US dollar were sought after whilst stocks, the euro and crude oil were shunned. European election apprehension saw investors dump French and German shares while the euro sank during Mario Draghi’s testimony to the European parliament.
The FTSE 100 was best of a bad bunch. Strong earnings from Randgold and a fall in the value of the pound cushioned UK stocks from the kind of deeper declines seen on the continent. Homebuilders were amongst the top fallers ahead of a government white paper which is expected to suggest new rules to make renting easier and criticise dependence on the biggest developers.
Stocks on Wall Street opened lower as exuberance over the prospect of lighter-touch regulation under Donald Trump was over-shadowed by tensions between the White house and the Judiciary. The decision to overrule Donald Trump’s travel bans edges the US one step closer to the kind of constitutional crisis that nobody would want to invest in.
Germany favoured in Europe election unease
Angela Merkel is expected to take the hot seat in German national elections but recent polling show she has a very thin lead over Social Democrats led by Martin Shultz. Investors are just starting to grapple with the political implications of a Germany without Merkel for the first time since 2005.
Still, despite Germany facing its own election risk, investors still sought the safety of German debt over French and Italian equivalents. The spread between German bunds and Italian BTPs rose to over 200 basis points for the first time since 2014. We think the likelihood that disgruntled Germans, unhappy with Merkel’s ‘open-border’ policy vote her out of office is higher than markets are currently pricing.
As the biggest economy in Europe and probably the single biggest benefactor of a weak euro, Germany is ultimately the most exposed to the rise in populism and the increased odds of a Eurozone breakup. Still, Germany’s far right parties like the AfD are very unlikely to lead the country, unlike in France where a Marine LePen victory could portent a Front National government. For that reason, the near-term political risk in France and Italy and Germany’s recent history as a haven mean we would be overweight German stocks until German federal elections in September.
Gold shines as Randgold reports
The price of gold hit an 11-week high on Monday as investors sought protection from a politically-motivated sell-off in equities. Adding credence to the gains in the price of gold was a simultaneous rise in the dollar index. This advance in precious metals is not just dollar-weakness. CFTC data shows silver speculators increased long positions for the fifth consecutive week.
Randgold Resources shares topped the FTSE 100 after the gold miner hiked its dividend by 52% as it reported a 54% leap in profits. Chief Executive Mark Bristow said the 10-year plan was to be profitable at a gold price over $1000 per oz. Randgold has proved its ability to keep costs under control while still expanding production and as such is a lower-risk option for gold bugs confident the yellow metal will hold its value.
We remain tactically bullish gold with the central premise that the Fed will be slow to raise rates this year, constraining the dollar. The biggest risk to this scenario is the next leg of the ‘Trump rally’ reduces the desire for safe havens. Even then, this is one of the most hated bull markets for stocks in living memory, so investors will likely still leave room for gold in their portfolio, even if equites continue to soar.