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Stimulus and peace talk hopes put a booster under markets

rising price graph

Markets in Europe have seen a sizeable rebound today, led by the DAX, with decent sector gains across the board, helped by comments from the Russian foreign ministry which stated that it would be better if their goals in Ukraine were achieved through talks.

Europe

This appears to have been construed as an increased willingness on the part of Russia to want to expedite an end to hostilities, given the unexpected high rate of losses currently being experienced on their side. Russia also said they didn’t want the overthrow of the Ukrainian government, or to take over the rest of the country, which does appear to be a shift from its previous intention to install a puppet regime.

For Ukraine’s part there is also a willingness to talk, however these talks would need to cover watertight security guarantees for Ukraine’s neutrality on the part of both the US and Russia. That is a very real problem where Russia is concerned given the current trust issues and Russia’s complete lack of reliability on that front, when it comes to previous promises that have been made and then broken. It is also what makes this current rebound extremely fragile, although it is very welcome, after the volatility of recent days.  

Markets are also garnering a level of support from speculation that EU leaders might be on the cusp of pulling together a fiscal stimulus plan at a specially convened EU summit tomorrow, as they look to outline a strategy to reduce dependence on Russian energy and bolster the bloc’s own security, though again here the capacity to disappoint is very real given that EU leaders still can’t agree on Swift sanctions on certain Russian banks with Germany being a hold out when it comes to Sberbank.  

The ECB is also meeting tomorrow, where it seems likely that we could see the central bank adopt a much less hawkish tone around monetary policy.

We’ve seen a strong rebound in the likes of Russian miners Evraz and Polymetal after they both released updates saying that they didn’t consider themselves to be at risk of being affected by Russian sanctions. Evraz went on to say it would continue to monitor the situation and inform the markets if anything changes.

Financials and banks have enjoyed another decent session today, on course for two strong days of gains, as the sector looks to shrug off some big declines in the past few days. 

It’s not been a good start to the year for the likes of life insurers, Prudential and Legal and General, with share price declines of more than 10% for both, so today’s full year results won’t have been too much of a surprise to investors. Yesterday the shares enjoyed a decent rebound largely on the back of a decent update from sector peer M&G, and this rebound has continued today as the sector starts to see a revival of getting caught up in the tsunami of selling over the past few weeks.

Legal and General’s full year numbers saw profits after tax come in at a record £2bn, an increase of 28%, while the company increased the full year dividend by 5% to 18.45p per share. Most of the operating profits came from the retirement and institutional business at £1.15bn, however this was down 6% from last year’s £1.23bn. All the other businesses saw an improvement with alternative assets in the form of clean energy and venture capital seeing a 68% increase to £468m. Insurance also saw an increase in profits of 42% to £268m. Assets under management came in at £1.42trn.

Prudential has also seen decent gains today after reporting a 17% rise in full year adjusted operating profit of $3.23bn. This was primarily driven by new business which accounted for $2.53bn, with the company announcing a final dividend of 11.86c, pushing the total dividend up to 17.23c, an increase of 7%.

Away from that the company still slipped to an attributable loss of $2.8bn compared to last year’s $2.2bn profit, though this was primarily down to a $4.2bn writedown on its discontinued US operations. 

On the downside defence contractor BAE Systems has slipped back, despite hitting a record high early on this morning, on the back of some profit taking after seeing strong gains over the past two weeks.

BP and Shell are also lower on the back of a sharp decline in oil prices, as profit-taking starts to kick in after some strong gains this week. 

US

US markets have taken their cues from today’s European session, opening higher as the recent rise in commodity prices starts to unwind. This weakness has seen crude oil prices slide back, dragging the likes of ExxonMobil Halliburton, and Chevron lower.

The sell-off in bonds and rise in yields is helping to push financials higher, with American Express, Goldman Sachs and JPMorgan Chase all pushing higher. Apple is also higher after announcing the latest upgrades to its Mac, iPhone, and iPad suite of products.  

FX

The more positive risk tone has seen the US dollar slide and the euro rebound strongly. A significant short covering rally ahead of tomorrow’s ECB rate meeting, and EU Summit has seen single currency take out the 1.1000 area, as positions get squared back in the event, we get a positive surprise from tomorrow’s summit on the fiscal front.

This squeeze on euro shorts has also seen the pound come under pressure, as it falls to its lowest levels this month against the single currency. Chatter earlier this week about joint bond issuance has helped support this week’s rebound in the euro, however it’s hard to see how the current move higher can be sustained unless there is something tangible to come out of tomorrows summit, other than warm words. 

Commodities

For the last three days Brent crude prices have tried to maintain a foothold above the $130 a barrel level and failed on each occasion. The inability to hold above here appears to have prompted a little bit of an unwind in positioning, with some profit taking.

We’re also starting to see an unwind in copper prices as we look to close lower for the third day in succession, after hitting a record high on Monday, and this is weighing on the mining sector, with declines in platinum and palladium prices as well.

Gold prices, which came within touching distance of their previous record highs yesterday, have slumped back sharply on the back of a much more positive tone in equity markets, and a rise in yields across the board, sliding back below $2,000 an ounce in the process. 

Volatility

There was limited variation yesterday in terms of market volatility, with bakers Greggs being a notable stand out. Fears over rising inflation took the shine off yesterday’s results, sending the stock down by as much as 10% in early trade and although the situation gradually improved through the day, losses still exceeded 4% by the close, with one day vol at 252% against a monthly print of 99%.

Despite the fact airlines risk being hampered by the soaring price of fuel, gains were seen across the sector yesterday with Air France KLM finally adding a little over 2% but doing so in an rather erratic manner driving one day vol here to 259% against a monthly print of 129%.

In terms of indices, yesterday’s fall – then rebound from – multi-month lows for India’s Nifty 50 served to drive price action. One day vol hit 141%, well up from the 41% print for the month, with action helped by exposure to many of the commodity sectors which have been in focus of late.

That leads us nicely into the sector, where palladium was back in focus, with the underlying tacking on a further 5% yesterday. Russia is the biggest producer, and the price has now doubled since mid-December, with one day vol sitting at 188% against a monthly print of 89% but in soft commodities, wheat posted a big reversion yesterday despite those mounting fears of supply shortages. Prices dipped more than 6% driving one day vol to 390% over a monthly print which now stands at 121%.


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