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Hawkish ECB tempers enthusiasm for European stocks, with US closed for MLK Day

Despite opening higher, European markets have struggled to hang on to their early gains slipping lower after the latest GDP numbers Germany showed the economy contracted at -0.3% in 2023.

Europe

With the outlook for 2024 not looking much better there isn’t much optimism that European companies will be able to improve revenues and profits against such a challenging economic backdrop, and a central bank that seems unwilling to even consider the idea of rate cuts at a time when the wider economy is on its knees.

With US markets also being closed for the Martin Luther King holiday there’s been little incentive to push markets higher, with the heavier tone in Europe also being driven by hawkish pushback on ECB rate cut expectations from the likes of German Bundesbank President Joachim Nagel, and Austrian central bank governor Robert Holzmann, amongst others. 

One story doing the rounds earlier today was talk that Deutsche Bank was looking at a possible takeover of either Commerzbank, or Dutch bank ABN Amro.

This seems like a slow news day story by the sounds of it given the significant regulatory hurdles any deal would have to overcome, and how it turned out for the last bank who took over the Dutch lender.  Europe already has one big mega bank in the form of UBS, and that wasn’t by design, which means it’s unlikely there will be a huge appetite for another one given the freshness of the scars of the last financial crisis. This comes across as a kite-flying exercise.

Today’s biggest fallers on the FTSE100 are lower due to broker downgrades. Burberry shares have continued their recent slide after getting downgraded by Goldman Sachs to neutral on concern over further weakness in its margins. HSBC is also lower on the back of a downgrade from BNP Exane on concerns over the impact of lower rates.

Lloyds is also under pressure on the back of a downgrade from Bank of America on concerns over the banks exposure to the car financing industry, before 2021.  

US

US markets are closed. 

FX

On currency markets we’ve seen some moderately hawkish chatter from various ECB governing council members, pushing back on the idea of rate cuts in the first half of this year, and which is helping the euro to outperform while acting as a drag on European equity markets.

Bundesbank President Joachim Nagel said that markets were too optimistic about the prospect of rate cuts and that it might be the summer before the topic is discussed.

Austrian ECB member Robert Holzmann was less circumspect saying that markets shouldn’t count on rate cuts in 2024 at all, and that he doesn’t see a “real recession coming”, which seems an odd thing to say, as if there are recessions that aren’t real?

Despite this pushback, markets are still pricing in the prospect of 4 rate cuts this year, which is still 2 less than is being priced for the US where the economy is much stronger.

The US dollar is also slightly better bid with the worst performers being the Japanese yen and New Zealand dollar.

Commodities

Despite rising to 2-week highs at the end of last week, crude oil prices have slipped back from above $80 a barrel, despite another US air strike on Houthi positions in Yemen over the weekend. The inability of oil prices to remain above $80 a barrel is welcome news for the global economy at a time when a large proportion of companies and consumers costs come from energy prices.

As we approach the halfway point for the Northern Hemisphere winter, UK natural gas have slipped to their lowest levels since last September, as have European gas prices despite the freezing weather currently sweeping across the continent. This is due to inventory levels being at still very high levels, above 80% and with half the winter already gone.  Barring a prolonged cold snap, it means that gas demand during the summer of 2024 is likely to be lower than last year, helping to keep a lid on prices.

Gold prices have remained fairly well supported after slipping to a 4-week low in the middle of last week as safe haven flow, and the prospect of US rate cuts helps to put a floor under prices.

 


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