European markets are firmly in the red as the global sell-off in stocks has taken hold. 

Europe

Ever since the US posted strong average earnings last Friday, traders have been rattled by the prospect of tighter monetary policy around the world. Economic indicators in the US, Europe and Asia point for a need to tighten up monetary policies from various central banks. Equity traders were enjoying a bullish run recently, and the jolt from the major decline in the US last Friday has triggered a worldwide round of profit taking.  

Ryanair revealed respectable third-quarter figures but the uncertain outlook put pressure on the shares. Profit before tax jumped by 4% and that was driven by a 6% increase in the number of passengers. The airline business continues to be engaged in a price war as Ryanair cut prices by 4%, but, their outlook wasn’t exactly bullish and traders latched onto the forecast. The share price has been in decline since August, and if the negative move continues it could target 1400p.

Tesco stated they expect to complete their £3.7 billion takeover of Brooker Group early next month. Charlie Wilson, the CEO of Booker Group will take over the UK & Ireland division of Tesco. The retailer stated that trading has been in line with expectations since the January update, and the company’s expects to make at least £1.575 billion in annual operating profit. The share price is down 1.2% today.

US

The Dow Jones and S&P 500 both started the session well and truly offside but have managed to claw back of their losses and now are basically flat.

US traders are getting used to the idea that US interest rates could be hiked four times this year. Last Friday acted as a remained that stock markets don’t go up in a straight line forever, and now we are seeing some short covering and bargain hunting.

The US ISM non-manufacturing report rose to 59.9 in January, up from 55.9 in December. It is worth noting the sector hasn’t had a reading above 60.3 since before the credit crisis, so the sector is near a ten year high.

FX

EUR/USD was helped along by the impressive services PMI reports from the eurozone earlier in the day, but the bounce back in the US dollar has dragged the single currency lower. The services sector in Italy jumped to its highest level since 2007, and Germany’s service industry grew to a rate not seen since 2011, but the prospect of four interest rate hikes form the Federal Reserve this year is fuelling the dollar rally.

GBP/USD went from bad to worse as weaker than expected services figures from the UK put pressure on the pound, and then the rally in the greenback just added to sterling’s woes. In January, the services sector in the UK slipped to a reading of 53, down from 54.2 in December, and this decline in growth rate encouraged selling of sterling. The robust average earnings from the US on Friday, and the jump in ISM non-manufacturing figures today pushed the greenback higher.

Commodities

Gold has come under pressure due to the turnaround in the US dollar, but it is still higher on the day. When you take into account down much equity market have fallen the upward move in gold is relatively small – it seems the flight-to-quality effect hasn’t played out. It is possible that dealers are wary about a series of interest rate hikes from the US this year, and that may be holding back other investors from buying gold.   

WTI and Brent Crude oil are in the red today as concerns about over supply are still doing the rounds. Last week the US revealed they are producing over 10 million barrels of oil per day – their highest output since the 1970’s.

The Baker Hughes report showed the number of active rigs in the US crept up to 765, up from 759 – which feeds in to the worries high supply levels from the US.

OPEC’s decision to extend the co-ordinated production cut to the end of 2018 helped oil hit a three year high, but that also prompted shale producers in the US to ramp up output which is now what we are seeing.  

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