Yellen’s testimony yesterday to the Senate Committee was more of the same. She reiterated that USD strength was a signal of economic strength and that weak oil had mostly been negative but would eventually be good for the economy. The main takeaway was that negative rates once again came up, the Fed chair is still evaluating both the necessity and the potential outcome of such a policy. As a result, US treasury yields fell and the market now basically pricing out any chance of a move by the Fed in 2016. If anything, despite Yellen’s denials that the Fed has and continues to misread the effect of USD strength on the rest of the world, the sovereign debt market is pricing in a rate cut, albeit a very small possibility. Nevertheless, the tables appear to be have turned and the ‘one and done’ scenario seems to be true now.
Asian trade overnight offered more of the same with the Nikkei continuing its downward path, down 4.8% and USDJPY holding above 112.00 but with a bias for additional downside having rallied from 111.0 to a flash high of 113.00 yesterday on speculation that the BoJ had been intervening. The bank itself made no comment either way but it will likely keep the pair in a consolidative pattern as FX markets will be mindful of the potential threat.
German quarterly GDP came in as expected at 0.3%, Italy on the hand, failed to meet expectations, only managing to grow 0.1% in the last quarter against the consensus for a gain of 0.3%. All of this tends to imply that the composite number for the Eurozone will be weak, likely growing a mere 0.3% in Q4. The flash number is released at 10am.
We have a plethora of additional macro activity today including Eurozone GDP and US retail sales, all of which will likely add to the volatility and confusion seen in recent weeks. Consensus is now for even more QE from the ECB in March and expectations are for a deposit rate cut to 0.4% and this will likely be reinforced by the weaker numbers coming from peripheral member states. This, for now, has done little to halt the stride of the euro which looks set to head higher against both the pound and the dollar is the risk off climate holds.
The FTSE is up 1.8% despite the heavy selling pressure in the US and Asia, we’ve seen this before and the lack of conviction in the move will likely manifest itself soon. You could say that the moves over recent days have been overdone but the FTSE has yet to register oversold form a technical standpoint and is still, despite dipping yesterday, holding above the 5600 level. It is being helped by some bargain hunting in the commodities space after positive reports for a change in oil supplies from members of OPEC.
Banks are also seeing gains as European financials make an effort to rally. Anglo American (+7%) and Standard Chartered (+6%) are the leaders in each of these sectors in the UK in early trade.
Gold, having broken a significant technical level yesterday, soaring over 5% has pulled back off the highs, so for a change, the gold producers are underperforming with Randgold (-0.16%) and Fresnillo (1.43%) taking a breather after yesterday’s moves and lacking the upside of the base metal producers this morning.
Rolls-Royce (+14%) has slashed its dividend for the first time in 24 years, cutting it to 16.4 pence. They keep their 2016 full year outlook unchanged despite a 12% fall in 2015 pre-tax profits. This morning the CFO has said there is no need for any rights issue, and the decisive action seems to have impressed investors who have been suffering thanks to frequent profit warnings over the last year.
GlaxoSmithKline (+0.5%) The UK's competition watchdog has fined pharma companies including GSK a total of £45m for conspiring to delay the entry of a generic drug between 2001 and 2004.
Commerzbank (+12%) a first dividend since 2007 has been announced, as fourth quarter profits came in better than expected. Having seen heavy selling this week, this will be some comfort to a number of European financials today.
Segro (+1.5%) the company notes recent media comment regarding a possible transaction with Roxhill Developments and confirms that it is in discussions regarding a possible arrangement that will enable them to strengthen their presence in the UK big box logistics market.
Supergroup (-8%) the stock is lower following a placing of shares by one of the founders, reportedly because of a divorce settlement.
We call the Dow Jones higher by 131 points to 15791.
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