FTSE underperforms on low oil and energy prices

FTSE underperforms on low oil and energy prices
by Ipek Ozkardeskaya

The European stock markets reversed earlier losses on the weaker euro, leaving the FTSE stocks back in the negative territory. The rout in iron ore is leaving its mark and preventing any credible moves through the 6400 level.

The FTSE effectively underperforms its European peers this morning and the negative divergence is mostly due to its high level of exposure to oil and commodity prices. The WTI contacts traded down to $41.50/bbl in Asia, copper futures are not willing to give up on the $2/lb support.

In London, BHP Billiton (-4.89%) leads losses, followed by Antofagasta (-2.19%), Anglo American (-2.17%) and Glencore (-2.05%).

Aberdeen (-4.21%) appears among the top Losers on the back of a tenth consecutive quarter of net fund outflows as emerging markets continue to look shaky.

The pound is testing the 1.50 mark. The rising selling pressures on the pound seem strong enough for a slide below the 1.50 mark against the US dollar. On the other hand, the recovery in euro-pound is brittle as the euro is less popular amongst buyers before Thursday’s ECB meeting.

Draghi has certainly more in its hat

The European central bank meeting is giving a good dose of stress to the Swiss National Bank and Riksbank.

The move in the Swiss franc has been the major event in the foreign exchange market last Friday. The EURSEK took a five-figure dive to 9.2158 this morning. Central banks are certainly behind the scene before the Dec 3rd ECB meeting. Given that the ECB is expected to expand its QE program and also cut the deposit rates into deeper negative territory, Riksbank and the SNB seem willing to play proactively to prevent an undesired appreciation in the krona and the franc.

The fact that the SNB and Riksbank acted one after the other, hints at a potentially major action from the ECB. The last time the Swiss National Bank had proactively cut its rates into negative territories, the ECB had followed with the launch of the Quantitative Easing Program. We shall now hear some more whistles in the headwinds from Sweden and Switzerland.

The level of pre-ECB stress suggests that the European Central Bank may have more in its hat.

The market expects a 20-to-40 basis point cut from the ECB and an expansion of monthly bond purchases from 60 to 75 billion euros. Given that the ultra-dovish expectations are already priced in, the euro could well appreciate should the ECB fail to satisfy the market appetite for more cash. The market may have gotten well beyond itself given that the expectations for the rate cut has deepened from a 10 basis points to 20-40bp cut presently. In this sense, the ECB may have been trapped in its credibility and may simply be forced to jump as high as the hurdle.

The question is, how dovish could Draghi go to avoid a EUR appreciation?