FTSE dives below 6200

FTSE dives below 6200

Ipek Ozkardeskaya

The FTSE stocks dived below the 6200 on the back of a fundamentally sour cocktail of bad news. The persistent contraction in China’s manufacturing activity has certainly caused an unexpected contraction in the UK's manufacturing sector. This combined with cheaper oil and commodity prices has dragged the basic materials, industrials and technology stocks down in London, while financials outperformed, despite discouraging news across the banking sector globally.

HSBC (+2.67%) was the front-runner at London open as the 14 percent drop in its first-quarter profit was smaller than market expectations. The investment banking business saw its trading income tumble due to challenging global conditions, but the Group CEO insisted on increasing the impact of cost reductions. He apparently convinced more than one.

In Germany, Commerzbank’s quarterly profits more than halved while in Switzerland, UBS printed a significant 64% slump in its Q1 profits besides the lowest transaction revenues ever. BNP Paribas also announced weaker performance in France, given the challenging economic and business environment. The poor performance out of the banking sector is nothing but a reflection of what’s really going on in terms of the real economy. Despite the ultra-accommodative monetary policies and very low, if not negative rates, money is not circulating in the economic tissue; banks have no choice but to suffer the slowdown in money flows.

Miners tumble as energy stocks trade under pressure today. G-7 countries said they will support energy investments, but this triggered little enthusiasm in the oil markets at the start of the week. The stagnation in five-year forward WTI prices suggests that the market may have already gone well beyond itself in the front month contracts. WTI is back below $45.

Anglo American (-7.51%)
Glencore (-4.82%)
Rio (-3.98%)
Royal Dutch Shell (-2.05%)
BP (-1.04%)

Australia hit a record low on rates

The Reserve Bank of Australia cut the cost of borrowing to a fresh record low of 1.75%, highlighting that disinflationary pressures and the stronger Aussie could complicate the economic adjustment. Australian stocks gained 1.84% as the Aussie tanked below 0.76 versus the US dollar for the first time in a week. The slide in AUDUSD could well accelerate down to the 75 cents mark and below, as hedge funds and macro funds are certainly looking for ways to wane their bullish positions on the Aussie after the currency rebounded 15% off its January lows against the greenback.
Caixin’s manufacturing PMI remained below 50 suggesting that the activity in China contracted for a fourteenth month in a row. Shanghai’s Composite gained 1.75% on hope that the lower rates in Australia and gloomy economic fundamentals in China would force the People’s Bank of China to take additional action to foster growth. Exports remain weak, however, and the job cuts are rather worrisome.

US dollar softens against euro, pound, yen and gold

Euro traded to 1.1542, an eight month high against the US dollar. Despite rising political critics against the European Central Bank’s (ECB) negative rate policy, President Mario Draghi reiterated that there is ‘no alternative to continued expansionary policies until the slack in the economy has been reduced’. But the ECB-doves are too shy to cheer up the euro-bears.

The yen’s biggest rally since Abenomics was launched, dragged the USDJPY below the 106 mark in Tokyo on rising panic that the stronger yen could jeopardise competitiveness and company profits if the Bank of Japan doesn’t take an action soon enough. Luckily, stock markets in Japan are closed until Friday preventing investors from aggressive price action.

Cable extended gains above the 1.47 mark for the first time in a month as traders continue unwinding their Brexit-short positions. Despite the knee-jerk sell-off on soft PMI read, the broad-based weakness in the USD keeps the door open for a further appreciation toward the 1.50 mark.

Gold traded above the $1300 for the first time in fifteen months.