Stronger USD and cheaper commodities mark the week's open

Copper weighs on the FTSE
by Brenda Kelly

French PMI out this morning would indicate that quarterly GDP is safe at 0.3% qoq but it still highlights a fairly uneven recovery. Reading for the services sector came in at 51.3, compared to 52.7 the previous month and versus expectations of 52.5 while manufacturing was in line with expectations at 50.8.

Germany saw its flash PMI’s beat expectations – services 55.6 (54.1 exp) and manufacturing rising to 52.6 against a forecast for 52. Germany data may have looked weaker than the peripheries of late, but this release shows that fastest rise in new business in 2 years; largest backlogs of work in 4.5 years; strongest employment since end-2011.

Nevertheless, an element of caution prevails in the equity markets this morning -what with the lock down in Brussels and the Eurozone flash PMI numbers all ahead today as well as a heavy macro week that includes US GDP, consumer confidence, PCE and durable goods orders all slated for release. The market is pricing in a 70% chance of a rate hike in December but data over the next few weeks will still be closely watched.

The Federal Reserve holds a discount rate meeting on Monday. There is some speculation that the 75 p discount rate could be lifted. While this is different to the Fed funds rate and unlikely in itself to be impactful, it would ultimately signal that the FOMC is making preparations for tightening mode and further underpin the greenback at the expense of risk assets.

Oil prices, and indeed all commodities are under pressure , with the dollar index rising towards the 100 level and the oversupply issues still presenting a problem to the commodity bulls.

As noted before, the direction of the copper price has a vast impact on the price action in the FTSE so given that we have fallen below $4500/T, it’s little wonder the mining contingent of the index is under some pressure. Prices are down 27% so far this year as fears that slowing economic growth in China, weakening growth in the Eurozone and oversupply all culminate in a sell off.

Glencore (– 5.47%)
Anglo-American (– 4.38%)
Antofagasta (– 3.27%)
BHP Billiton (– 3%)
Rio Tinto (– 2.03%)

At present only 6 stocks are on the up and these gains are fairly marginal and mostly related to defence and indeed defensive stocks.

Babcock Intl (+0.61%) - said to be among the rivals for the UK defence contract – running fire, rescue services at UK military bases and airfields including the Falklands.

BAE Systems (+ 1.36%) Prime Minister David Cameron will announce plans Monday to boost Britain’s military equipment budget by 12 billion pounds ($18 billion), the latest in a range of government commitments to fight terrorism and other security threats as Europe remains on a state of high alert.

Up to 371 jobs are being cut at defence giant BAE Systems as the group said it was slowing production of its Typhoon jet fighters. The job losses will affect its 10,000-strong workforce in Samlesbury and Warton, which makes the Eurofighter Typhoon.

Rolls Royce +0.54% attempts to revive the company starts with cuts to the senior management team. CEO Warren East is reticent about demerging its aero engine business.

Imperial Tobacco (+ 0.37%) - with the takeover rumours in the full swing, the tobacco company has been given a lift – raised to buy at Citi

Volkswagen (– 0.71%) reports over the weekend that the business has suffered in the aftermath of the emissions scandal are labouring the stock price this morning. Sales have apparently declined significantly and the company is expected to reduce its capex plans for 2016.

Shares in Argos and Homebase owner Home Retail Group have jumped 6.48% after £1bn takeover speculation. Given the low valuation of the company and questions regarding the transformation plan in Argos, it shouldn’t be surprising that private equity groups are vying for the retailer.

We are calling the Dow slightly lower to 17803.

Stronger USD and cheaper commodities mark the week’s open
by Ipek Ozkardeskaya

The US dollar made a strong start to the week. The greenback gained against all of its major G10 counterparts in Asia; the DXY index nears 100 for the first time in March with growing conviction that the Fed will increase the federal funds rate in December for the first time since 2014. The hawkish Fed and the dovish ECB will remain on the macro-headlines to the end of the year.

The euro extended losses to its lowest levels in 7 months before rebounding on better-than expected German PMI figures in the European open. Even the encouraging PMI read from Germany and the cheaper euro couldn’t revive the appetite in the DAX. All sectors trade south in Frankfurt, expect financials.

The German-led optimism in the euro could be short-lived as threats from terrorists spread over the big major European cities. Brussels is on lockdown on terrorism concerns.

The euro is close to oversold market conditions, with the RSI pointing at 32% today. A renewed upside correction is expected to remain capped at 1.0700/1.0750, only surpassing 1.0790 (Fib 38.2% on Oct 30– Nov 18 decline), the EURUSD will technically step in bullish consolidation zone and could push for further gains to 1.0860 / 1.0960 (21dma / minor Fib 23.6% on Dec’14-Mar-Apr sell-off).

The broad picture remains comfortably negative however; top sellers have their eyes wide-open to strengthen their shorts at the best rates. The mid-term direction remains bearish with unchanged target at 1.0500/1.0450 zone.

The pound under pressure as commodity prices dive

Nickel dropped 4% while copper lost another 2% to $2/lb on China concerns. The WTI and the Brent are down by 3% and 2% in London. The renewed weakness in the energy and commodity markets explains the early losses in the FTSE (-0.80%). The FTSE has been the most negatively impacted within the European equity complex. Glencore, Anglo American and Antofagasta lead losses. The selling pressures could intensify should the copper cheapens below $2/lb.

The risk is off.