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Equities softer as oil consolidates

Most of the Asian stock indices ended the week on a softer tone despite a further pick up in oil prices overnight. Shanghai’s Composite and Hang Seng were down by 0.50% and 0.92% respectively; Australian ASX was 0.72% weaker despite the surprise revenue growth announcement from Santos, a leading oil and gas producer in Asia-Pacific region. Santos announced 11% expansion in production and 1% gains in its revenues in Q1. Such positive surprise, combined to the recovery in the oil market, could be an invitation for investors to step back into energy stocks ahead of the weekend.

Brent consolidates at about the $45 mark, as WTI trades above the $43. The oil market is preparing to close the week with a third consecutive week of gains. Many investors continue to price in the possibility of a production freeze from the OPEC despite last weekend’s disappointment in Doha.

Japanese stocks were the exception. Nikkei and Topix gained 0.65% and 0.93% on weaker yen. The USDJPY traded above the 110 mark on news that the Bank of Japan  (BoJ) may widen its scope for negative rate applications at next week’s policy meeting. Japan is now looking for ‘double-barrelled stimulus’, in other words a combination of monetary and fiscal stimuli, to curb any appreciation in yen.

Notes on the European Central Bank meeting

The European Central Bank maintained the status quo as widely expected. President Mario Draghi revealed details on the corporate bond purchases program; the most important feature being that the corporate bond purchases will not be an addition to the monthly 80 billion euros worth of asset purchases, but will be part of it. The announcement has taken some pressure off the Eurozone sovereign bond yields, which are higher across the board this morning, except for Greek yields.

Talks on negative rates are heating up, however. Mario Draghi punched back the criticisms on negative rates, saying that the impact of the monetary policy is lessened by the lack of structural reforms, which in return, requires more monetary action.
Then, German Chancellor Merkel stepped in to back up criticism- that helicopter money hasn’t been discussed.

In summary, it’s hard to say whether the ECB was less dovish than what the market expected. Some mixed messages in respect of expected higher inflation in the second half of the year coupled with a comment that rates would remain the same or lower will keep everyone guessing for now. The EURUSD holds ground at 1.1270 in the aftermath of Draghi’s press conference. Technically, the pair remains in the positive trend building since the beginning of March and could extend gains toward the 1.15 mark, if support at the critical 1.1219 level (major 38.2% retrace on March-April rally) holds.
PMI data this morning has been fair although French manufacturing has slipped even deeper into contraction at 48.3 versus 49.9 expected. Germany, by contrast saw its manufacturing PMI rise to 51.9 against a forecast for 51.0

FTSE stocks opened mixed following the risk-off trading session in Asia despite the further pick-up in oil prices.
 All sectors traded south at the open. Energy and miners lead the losses in London.

BP (-0.98%)

Royal Dutch Shell (-0.82%) is working on selling out of its onshore assets in Gabon, according to two sources familiar with the matter, seeking to refocus its African presence. (Reuters)

In Australia, Santos, one of the leading oil and gas producers in Asia-Pacific region, announced 11% expansion in Q1 production and higher and 1% gains in revenues. Such positive surprise could be a reason to reverse the early losses in the UK energy sector.

Rio Tinto (-2.39%)

BHP Billiton (-0.78%) does not expect recent rise in iron ore and metallurgical coal prices to hold for more than a few months, as more low cost supply is set to hit the market, its Australian chief said on Thursday. (Reuters)

Ashtead Group (+1.29%) pares yesterday losses.

Sainsbury’s (+0.90%) raised to buy vs hold at Deutsche Bank.

Persimmon (+0.27%) raised to hold vs sell at Liberum.

The carmakers are again under the spotlight as emission scandal is spilling over the entire sector globally.
Automakers across the globe are expected to remain under a decent selling pressure amid,
•             Mitsubishi lost 40% of its market value in Japan over the past three days on widening mileage scandal,
•             Volkswagen said to compensate the US customers following the announcement to buy-back contaminated cars. According to several sources, the US compensation could cost the company at least 10 billion dollars.
•             Anti-fraud investigators have raided Peugeot-Citroen offices yesterday.
•             Daimler is also under investigation in the US. The company posted a significant 8.5% fall in Q1 operating profits. The earnings announcement saw little attention on news that Daimler has also started an investigation following the US Department of Justice request.