Financial market research and analysis

The circuit breaker was suspended before the Asian open, Shanghai’s Composite Index first dipped 4.30% before bouncing to gain 2% later in the session. PBoC’s intervention to support yuan via state owned bank traders helped.

US and European equities traded flat after yesterday’s sell-off. Oil stabilized after having tested $32 for the first time in 12-years yesterday. We see a cool-off in tensions in the European equity markets this morning after a very shaky start to the year. Yet the risk appetite will certainly be limited.

Again the energy and miners are leading the FTSE stocks. Anglo America (+3.35%), Glencore (+3.19%), BG Group (+3.17%), Rio Tinto (+2.19%) and BHP (+2.09%) rank among the top gainers as the oil and commodity prices have partially stabilised along with Chinese stocks. Copper rebounded from $2/lb while oil bounced from $32.10, a twelve year low.
Some of the major companies with exposure to China have staged a small bounce with Burberry adding 2.23%. This could be down to some position unwinding rather than any real confidence that a real recovery is underway.

Tesco rallied 5.68%, upgraded to overweight by Barclays citing that the valuation is ‘attractive and next week’s sales report may be less worrisome’.

Overall the caution reigns as it may be too early to call for a sustainable stabilisation. The FTSE is in an effort to beat the 6000 offers this morning yet the disappointment in UK’s trade data could be a drag to any rally.
The UK’s trade deficit narrowed to £3170 as cheaper oil helped importing goods at lower costs, yet data missed the market estimate of £ -2700. The pound’s decline against the US dollar may have biased the expectations. Despite more than 3% depreciation against the USD, the pound gained 0.58% on trade weighted basis in November. Hence, the UK products are still expensive abroad and the economy has more to gain from a cheaper currency.

Pound hits the bottom

Cable hit a fresh 5-year low 1.4534 yesterday. The USD leg should determine whether the pair is ready for a rebound or a further sell-off is on the way. While the BoE doves have good reasons to remain in charge, any disappointment in the US jobs data could push the Fed hawks to the sidelines; hence give support to the pound against the dollar. Big vanilla puts at 1.47/1.48 and 1.4550 for today’s expiration.

EURGBP rebounded from 0.7470, a stone’s throw lower than October 2015 pick of 0.7493. Macro funds could well jump in to sell the rally at 0.75+ to trade the divergence between the BoE and the ECB policy outlooks.

US releases year’s first jobs data

The major macro event is the US labour data. The US economy is expected to have secured a solid 200,000 nonfarm jobs in December. If this is the case, it could well give some comfort to Fed hawks and lend some support to the US dollar. If not, the sentiment in the US will almost certainly turn sour in the current choppy conditions. In the worst case scenario, the market could easily start questioning whether the Fed’s 25 basis points hike was premature and ultimately raise doubts as to how realistic and appropriate a 1% hike through 2016 would be.

US equity futures outperform before the jobs data, yet the downside risks prevail. The volatility index is around 25% and investors continue sitting on cash, little convinced vis-à-vis the timing of a bullish move.

We call the Dow 210 points higher and the S&P500 25 points higher at the open.