Gold surges as equities tank

Gold surges as equities tank
By Brenda Kelly

Janet Yellen’s testimony was for the most part a reiteration although she did admit that the outlook for the US could be affected should ongoing global risks persist. The dollar is weaker on the back of the testimony as it now seems fairly clear that while the Fed is committed to normalisation in rates, it won’t necessarily be hiking them again in the near term. It’s not dovish enough for equity markets, which fell in the wake of the event and continue to do so.

If you needed proof that yesterday was a flash in the pan with a relief rally in financials buoying sentiment temporarily.

Credit Suisse chief executive Tidjane Thiam may not think the selloff in bank stocks is justified but investors don’t exactly care. The stock is down 5% today but the wider sentiment towards European banks is risk off. Soc Gen reported its net profit rose almost 50% to 4 billion euros (US$4.5 billion) in 2015, compared with a year earlier, its off by 12.6%, as profits were hurt by drop in securities.

European equities are tanking – the FTSE is lower by 2.75%, Cac -2.89%, Dax – 3.24% and the FTSEMIB -5%.

Only 4 stocks are in the green this morning on the FTSE100 with Fresnillo (+3.43%) and Randgold (+3.42%) leading the charge.

Gold has managed to break above $1200/oz, its highest since May last year and this has helped to drag gold producers higher. The same cannot be said for the rest of the index which is lagging significantly with materials and IT dragging.

Arm Holdings (-7%) Cut to underperform at Bernstein. The lows of 24/8 are the ones the watch now at 811.5p given that we see 17 brokers with a buy rating on this stock, we may see additional downgrades in the coming days.

DCC (+3.8%) Up on the back of a very strong trading performance in third quarter. Raised to a “Buy” Vs “Hold” at Panmure.

Rio Tinto (-8%) The mining giant has ditched its progressive dividend policy after profit’s slump by 51%. The global miner slumped to a net loss for 2015 hit by the rout in commodities.

Glencore (-6%) Reported a 5.7% fall in fourth-quarter copper output.

Imperial Brands (0.5%) The British tobacco company has posted a rise in first quarter revenue despite volume declines, aided by price increases in several markets.

BP (-5.54%) The CEO of BP is bearish on oil, so this tells you all you need to know. The company is planning for oil prices to stay low in H1 and expects surplus production to only begin to diminish when storage tanks fill up in the second half.

Japan may be closed for National Foundation day but that has stopped the FX markets, USDJPY has fallen dramatically which tends to indicate the risk aversion still apparent in financial markets. It trades at 112.79, up from a low of 112.28.

Asian markets have struggled overnight on ongoing credit risk fears, with the Hang Seng playing catch up from the Lunar New Year holiday and falling 4.9% with declines led by energy, IT and telecom companies.

The International Energy Agency on Tuesday said it believes demand growth will fall significantly, and the global oil surplus will be larger than the group earlier forecast. It identified several factors that are needed to trigger a rebound in prices including an output cut by OPEC and non-OPEC producers, slower production growth, and boost to demand growth as prices remain low. U.S. dollar devaluation is underway but more will be required along with and significant declines in non-OPEC production.

Nevertheless, the market remains oversupplied by 2m barrels per day. Brent crude trades at $30.71/bbl while WTI remains below $30, at $27.08/bbl.

All the talk of currency wars will likely continue but will for now fail to really underpin equity markets. The Riksbank have cut repo rates to -0.5% to safeguard the inflation target and maintains the scope to cut the repo rate further. It expects a stronger economy but with lower inflation for longer.

With little on the macro calendar today to give any real boost to risk we look for US markets to open sharply lower too.

Dow futures point to a 274 point loss at the open.