By Jasper Lawler, Head of Research
Available via Globelynx at ‘London Capital Group’
Twitter: @jasperlawler Email: email@example.com Tel: 0207 456 7086
New records were abound in markets on Wednesday. Wall Street led the charge with Walmart driving the gains for a new record on the Dow on Tuesday. Asia shortly followed suit. Japan’s Nikkei struck its highest since 1996 while South Korea’s Kopsi hit a fresh record high on Wednesday.
Equities: Nikkei 21-year high
Tokyo’s popular mayor and opposition leader Yuriko Koike deciding against running for Parliament has paved the path towards the re-election of Japanese Prime Minister Shinzo Abe in the snap election this month. That catapulted Japan’s Nikkei to its highest since 1996, before the Asian financial crisis. Japanese investors are welcoming the idea of a continuation of Abenomics for obvious reasons. The easy-money policy caused a drop in the yen, a jump in corporate profits and involves the direct buying of equities by the country’s central bank.
Markets are viewing Catalonia as another budding risk-event which has fallen by the wayside. Spain’s IBEX was best performing European index on Wednesday by a wide-margin. Broader markets barely flinched at the chance of Catalonia separating from Spain anyway. We expect Spanish yields to come in and Spanish stocks to begin a catch-up with European peers. It makes sense to start to price back in Spain as leading the charge for European economic growth and price out the political risk surrounding Catalonia.
The FTSE 100 eased back from near 3-month highs, led by a sharp decline in Mondi shares. Banks have been the market’s fall guys for the rising risk of a ‘No-deal’ Brexit. Mondi shares slumped as much as 8% after the packaging company warned on full-year profits despite hopes of an up-beat final quarter.
Forex: ‘No deal’ hurts Sterling, FOMC minutes
Reduced political risk in Spain has seen the euro leap to a 2-week high versus the dollar. The ‘correction’ in the euro’s uptrend caused by the Fed’s plans for a 3rd rate hike this year and Spanish political uncertainty has been relatively meagre. With Catalonia out the way, the market’s attention may refocus on ECB tapering and put upward pressure on the euro.
The increasing risk of a ‘No deal’ Brexit is making hard work of gains in the pound this week. The Bank of England is assuming a smooth Brexit transition. If politics dictates this assumption need to change, then so will its plans for a rate hike.
The dollar was mixed before the release of FOMC minutes later on Wednesday. Fed speakers have been almost universally supportive of one more rate hike this year. The minutes will be a bit stale since they don’t consider the big deceleration in jobs growth in September. The timing and size of how the Fed will shrink the balance sheet is now pretty well understood. Overall there seems like little scope for surprise.
Commodities: Barkindo’s ‘extraordinary measures
Oil prices have continued the surge that began on Tuesday. Brent crude oil is tapping on the door of $57 per barrel, 3 days after testing $55. Oil has rebounded from 2-week decline after OPEC Secretary General Mohammed Barkindo said the cartel might have to take ‘extraordinary measures’ to restore stability. The market is interpreting this as more production cuts in 2018. The involvement of Russia and other non-OPEC nations in output-cuts seems to have emboldened OPEC. This statement from Barkindo would suggest OPEC’s plans after expanding from stabilising prices to rising prices.
Gold is pulling back from $1290 per oz and its 20-day moving average before the release of FOMC minutes. Haven flows before the possible announcement of Catalonia’s independence go some way to explain gold’s 3-day rally so, depending on the Fed, there’s scope for another drop.
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