UK & Europe

UK and European shares fell sharply on Friday with a second weekly decline taking indices to the lowest in over a month. The FTSE 100 fell below 6000 to levels not seen since September while the German DAX broke beneath 10,400 to its lowest in five weeks.

Things were always going to be nervy leading into the Fed meeting but the addition of plunging oil prices, ECB stimulus disappointment and Chinese currency devaluation has been too much for markets to bear.

Fresh seven year lows for the price oil is having the most direct impact on stock markets through the energy sector. Royal Dutch Shell, BP and BG Group combined made up over a third of the points losses on the FTSE 100 on Friday. International Energy Agency forecasts provided the impetus for the latest declines.

Defensive sectors including utilities and healthcare were best of a bad bunch on the FTSE 100 where every sector was trading lower. Basic resource shares were a drag hampered by a broker downgrade for Anglo American and a poor take-up for a Lonmin rights issue which took shares of the platinum producer below the 1p offered in the new issue.

Old Mutual was punished again for its links to South Africa as shares added to Thursday’s decline tanking double digits on Friday in the wake of the sacking of the country’s finance minister. Former finance minister Mr Nene was trying to rein in government spending to adjust for the slowdown in the economy. The worry that has rating agencies ready to downgrade South Africa’s bonds to junk is that new finance minister David van Rooyen may have been put in to ramp up spending for political purposes against the best interests of the economy.

 

US

US stocks slumped alongside global markets on Friday amidst a weaker oil price ahead of next week’s Fed meeting. Shares of DuPont were down as much as 5% after having agreed to a merger with its biggest chemicals company rival Dow Chemicals.

 

FX

The dollar was mostly weaker after US retail sales rose less than expected in November. The dollar gained against commodity-related currencies including the Australian and Canadian dollar. Stripping out automotive sales, retail sales actually rose more than expected in the month, suggesting perhaps the influence of the Volkswagen saga on overall auto sales.

The pound, euro, Swiss franc and Japanese yen all rose in sync against the dollar amidst weaker US economic data.

 

Commodities

Brent and WTI crude got knocked down to seven year lows after the latest report from the IEA confirmed fears of an over-suppled market leading into next year. The IEA has said it sees the oil market as oversupplied until late 2016. The agency revised higher demand forecasts but still expects demand growth to fall next year to 1.3m bpd from a five-year high of 1.73m bpd in 2015. Non-OPEC supply is seen contracting by 0.6m bpd next year, unchanged from previous forecasts.

After falling alongside oil prices early on, gold found value as a safe haven once stock market losses started to accelerate. Disappointing US retail sales growth increases the risk of Fed policy error by raising rates next week amidst a decelerating economy. Gold is being used as Fed disaster protection.