Financial market research and analysis

INDICES: STOXX 600 fresh record, Dow 29k?

European shares have opened mixed on Friday after a strong session in Asia, while LCG pricing points to Wall Street opening higher.

Stock markets are sitting at record highs because visions of better global growth and reduced geopolitical tensions has made investors more at ease taking risk. Friday looks like the day the Dow Jones will break 29,000 for the first time. Even in Europe, where the growth outlook is murkier the Euro STOXX 600 index touched record highs.

It’s probable that markets are throwing caution to the wind when it comes to the US and Iran. The tragic downing of the Ukrainian Boeing 737 in Iran could turn into another flash point. The US President as well as the Prime Ministers of the UK and Canada have all said the evidence points to the plane being shot down, presumably unintentionally by Iranian surface-to-air missiles. If and when new sanctions are imposed and if other partners in the Iranian nuclear deal pull out, the Iranian regime will be under even more pressure. That hopefully means coming hat-in-hand to the negotiating table but of course could deliver much worse outcomes.

EQUITIES: Apple new record high

US President Donald Trump has said the US- China trade deal is to be signed January 15. The direct benefits of more amicable relations between the US and China are plain to see in reports of rising iPhone sales in China and new record highs for the Apple share price. Apple is leading the charge taking the Dow Jones above 29,000 for the first time. Of course other factors like seasonality and new model releases play into it, but the easing of widely-reported anti-US sentiment in China against Apple because of the trade war is important.

FOREX: NFP, Carney & German industry

The euro is slightly firmer on Friday as industrial output data is released in France, Italy and Spain. Stocks as well as the euro have gained ground on signs of green shoots in Germany’s industrial sector. German industrial production for November exceeded expectations, offsetting disappointing factory orders reported earlier. Traders have been keeping a close eye on economic activity in Germany’s heavy goods industries for signs of a broader rebound across Europe. We don’t anticipate a magic bullet to the structural problems in 2020 but a bottoming out in manufacturing activity looks like enough for investors to add weight to Europe in portfolios.

The US dollar is easing back from a surge in investor demand in the second half of the week. Looking forward we have the first non-farm payrolls release of the New Year. The US is expected to have created 164k jobs in December after the shock 266k reported in November. Average hourly earnings are expected to come in at 0.3% m/m versus the 0.2% previously giving a healthy 3.1% annual rise in wages. US unemployment is forecast  to hold firm at 30-year lows of 3.1%.

GM workers returning from strike action flattered the November jobs figure so we’re expecting jobs growth to dip back below 200k in December. A jobs slowdown doesn’t need to be a problem for the dollar when it’s a function of being close to fully employed. Wage growth is still well above inflation and that’s good for consumer spending, which is helps the economy and probably satisfies the Federal Reserve that it can dial down its quasi-QE liquidity actions.

The British pound remains under pressure in the wake of comments from its outgoing Governor. Mark Carney’s dovish remarks caught us by surprise in an environment where economic and business sentiment had been improving since the decisive UK election result. Governor Carney ’s warning that the British central bank doesn’t have enough room to ease policy if needed is a problem, arguably of his own-making. Now near the end of a 6 ½ year tenure, Carney has presided over a BOE that kept interest rates at rock bottom. Carney went on to suggest the bank’s Monetary Policy Committee is considering cutting interest rates or increasing government bond purchases as a way to enable any economic recovery this year. Given that Carney is half-way through the exit door, his remarks should have less influence and we’re looking at this as possible a buying opportunity in Sterling.

COMMODITIES: Oil slide continues after rising inventories

The diminished threat of a war in the Middle East and rising US inventories have been a double whammy for oil in past two days. The price of oil is now below where it was before the US drone strike that killed Iranian General Soleimani. Coming off the back of a six week rise, we think positioning explains a lot of this price move. Profit taking by oil traders means less emphasis is being placed on the next week’s signing of the phase one trade deal.