Financial Market Research and Analysis

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Risk aversion as oil prices fall

As expected the RBA stood pat on its overnight cash rate keeping it at 2% but leaving the door open for additional policy easing on foot of weak inflation levels.
The Bank of Japan governor Kuroda stressed his readiness to expand monetary policy even further. Market moves would be key, he said, in determining the next bout of stimulus. He maintained optimism that the economy was recovering – this in spite of last week’s Tankan survey which indicated a souring business mood on weak EM demand. It’s would seem that the market is not exactly on the same page – USDJPY fell to a session low of 110.30. Major support lies at 110.00 and should European markets take their cues from the weak Asian session, we may well see this level tested. The Nikkei closed down 2.42% on the back of the strengthening yen.

German factory orders fell 1.2% in February due to decline in exports. The strong trend in EURUSD remains intact and while above 1.1340, it  not necessarily bode well for future export growth. Any dovishness from the Fed minutes could be the trigger to push EURSD pack through the 1.1425 highs set last week. With weakening oil prices still the ongoing theme and equity indices losing steam as a result, the potential for capital flow to the German bund has increased – this will be positive for EURUSD and will most certainly not work in the favour of the ECB’s plan.

It’s services PMI day in Europe. So far, Spain has managed to beat consensus printing 55.3 (exp. 54.2) with the fastest activity in 4 months. An increase in outstanding business was also recorded, and higher workloads encouraged further job creation.
France continues to disappoint with its output remaining in contraction as the evidence begins to pile up that France’s economy is flatlining.

Germany posted 55.1 – below expectations but with a rise in new business recorded, even if it was the weakest since last October.
Business activity in Italy service sector rose at the slowest rate for over a year as it posted 51.2 in March.


With the service sector accounting for in excess of 80% of UK economic output today’s release will need to at least meet expectations. Analysts are forecasting a reading of 52.7, any disappointment on this will likely shunt sterling lower. Despite EURUSD retreating below the 80p marker, the trend is still very much intact. The Eurozone's Service PMI has been outperforming the UK's Services PMI by a widening differential after the two tracked each other quite closely. The main fly in the ointment may arrive in the form of EU retail sales- forecast to show a slowdown to 0.1% from the previous 0.4% rise in January.
Equally against the dollar, the $1.42 level is holding for now, but any further signs of a weakening economy as we approach the EU referendum in June will likely be construed as a sell signal for FX traders.
Thirty minutes in and the FTSE was already off by 1% with all sectors floundering but energy and materials the worst performers. 

Investors seem to be focused on rotating into defensive stocks with risk aversion quite apparent across the board. The Dax and Cac are lower by 1.77% and 2.25% respectively.

Equity highlights

BHP Billiton (-4.34%) takes the bottom rung as the Mossack Fonseca files have raised questions over the 2001 merger.

Glencore (-3.74%) and Anglo American (-4.11%) are set to sell off more mines as they restructure and seek to cope with the downturn in commodities. While a recovery in base metal prices is inevitable in the long run, the present outlook for global growth and the ongoing supply glut is hampering.

Randgold (+0.3%) higher as gold bounces back to $1228/o on risk aversion.

Shell (-2.66%) has withdrawn its bid to drill in Norway’s arctic as a result of the oil rout.

Rolls Royce (-2.2%) Cut to underperform yesterday by Credit Suisse, the decline continues for the stock. It was at one point up 15% ytd.

Berkeley Group (+1.37%) the developer has won planner support for 652 homes in West London according to Bloomberg. This has helped drag the likes of Persimmon and British Land higher too

The oil rout has some benefits – the airlines. EasyJet (+1%)

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