Stock markets in Europe and the US have continued to attract support overnight and this morning, a particularly strong performance in the face of further China weakness. This shows just how much sentiment has improved over the last couple of weeks.
Back in January it was like an earthquake rocked the markets sending stocks and oil sharply lower and capital flowing into defensive havens like gold and JPY. Big declines in China had broad effects throughout the world. Last night Shanghai and Shenzen fell 6.4% and 7.3% but the broader impact of this aftershock was contained to a 1.6% drop in the Hang Seng. This indicates that traders recognize market volatility in China may not have a broad impact on its own economy let alone anyone else’s and that bears overplayed their hand there.
European indices have been staging a catch up rally this morning relative to the US. The FTSE
is outperforming the DAX rising 2.3% vs 1.3%. UK stocks are being led higher by Lloyds Banking group which has soared 10% after it tripled its dividend and indicated that charges related to payment protection insurance are winding down.
Canadian banks are also in focus again with CIBD and TD reporting. So far reaction to bank earnings has been sloppy. RBC fell yesterday as traders focused more on its earnings miss and exposure to the oil and gas sector (and housing in energy producing regions) more than its dividend increase. US markets may also pick up support from the retail sector with Best Buy and Kohl’s posting better than expected results this morning.
Meanwhile, defensive plays appear to have reached their limits. Yesterday JPY completed a double bottom against USD, suggesting a bearish extreme has been reached. Both tried to take advantage of the China plunge, but didn’t get very far and have been falling back as the morning has progressed. and actually went the other way.
Crude oil also appears to be washed out with WTI holding near $32.00 in the futures market and $30.00 in the cash market. Oil sensitive currencies like CAD, RUB and even NOK (which had been caught up in European weakness this week) are rallying to confirm oil fears easing.
While on the topic of markets looking oversold, GBP has started to find some support and is bouncing back from depressed levels against USD suggesting the price has now adjusted to reflect Brexit vote risk. Cable still remains below $1.4000, however, which it needs to regain to call off its recent breakdown.
The main focus for US trading today is on durable goods orders with the street looking for a rebound from last month’s dismal drop. Last night St. Louis Fed President Bullard confirmed his dovish shift questioning raising interest rates when oil prices and inflation are falling, although Fed members who are voters this year have taken a more neutral stance. Still, durables could kick off another round of speculation on what the Fed may do. Remember, the street has been taking weak economic reports as a sign of economic struggles and a big miss could rekindle US recession talk that would go away with a big enough rebound.
Talk around the upcoming G20 finance ministers meeting could also have an influence in trading. While no fiscal support for the world economy is expected following comments from US treasury secretary Lew earlier this week, we could see discussions about negative interest rates and currency movements.
TD Bank due to report earnings today
CIBC due to report earnings today
Pengrowth Energy CFPS$0.21 vs street $0.16, dividend remains suspended for 2016
Best Buy $1.53 vs street $1.39
Significant announcements released overnight include:
UK GDP 1.9% as expected
Spain GDP 3.5% as expected
Germany GfK consumer confidence 9.5 vs street 9.3
Germany consumer prices 0.4% as expected
Sweden consumer confidence 98.0 vs street 96.8
Sweden producer prices (3.1%) vs previous (1.9%)
Italy retail sales 0.6% vs pevious (0.1%)
Eurozone consumer prices street 0.4%
Eurozone core CPI street 1.0%
Upcoming significant announcements include:
8:15 am EST FOMC Lockhart speaking
8:30 am EST US durable goods orders street 2.7% vs previous (5.0%)
8:30 am EST US durables ex transport street 0.3% vs previous (1.0%)
8:30 am EST US jobless claims street 270K
9:00 am EST US FHFA house prices street 0.5%
10:30 am EST US natural gas storage street (144 BCF)
11:00 am EST US Kansas City Fed (6) vs street (9)