Euroland Stocks Rally and Oil Retreats Further

December 7, 2016

The ECB Governing Council, which meets tomorrow and is scheduled to release new forecasts, is widely expected to unveil an extension of planned asset purchases beyond March 2017, the current termination date of the program.

Stock markets are up today in Europe by 2.9% in Greece, 1.6% in Germany, 1.5% in the U.K., 1.8% in Italy and 0.8% in France.

A little more than six weeks still remain before Donald Trump gets sworn in as the 45th U.S. president, but already he is affecting financial markets in a variety of ways. Expectations of fiscal stimulus boosted U.S. real interest rates right after the election, which lifted share prices and drove down bond prices. Bank shares benefited in this adjustment. The President-Elect has not hesitated to single out individual companies for condemnation via the Tweet, so there have been losers too, like Boeing, United Technologies, and drug development firms.

OPEC had lifted oil by agreeing to a production cut, but that boost is quickly coming unglued. Trump favors U.S. energy independence and has no problem with fracking to produce oil from shale. The new-think is that OPEC’s enforced reduction will be neutralized by increased U.S. production. WTI crude fell 1.3% today to $50.26 per barrel.

Gold is 1.0% higher at $1,181.20 per ounce.

The dollar and sterling weakened overnight.  The U.S. currency fell 0.7% against the Mexican peso, 0.6% relative to the kiwi, 0.3% vis-a-vis the euro, 0.2% versus the yen and 0.1% against the loonie, Swissie, Aussie dollar and yuan. The British pound weakened 0.7% against the dollar, however.

Equities around the Pacific Rim went up 0.7% in China, South Korea and Japan. Today is the 75th anniversary of Japan’s bombing of the U.S. Pacific fleet in Pearl Harbor, Hawaii.

Ten-year sovereign debt yields have fell back today by four basis points in the U.K., 3 bps in Germany and the U.S., and two basis points in Japan.

Three central banks held interest rate policy meetings today.

  • The Bank of Canada’s overnight rate target was left at 0.50%, the level since cuts of 25 basis points each in January and July of 2015. The current stance was called appropriate. A significant rise in long-term rates was noted as part of a global trend, but inflation is projected to remain subdued amid continuing slack.
  • The National Bank of Poland‘s reference rate stays at 1.5%, a record low. Reductions totaling 125 basis points between ┬áNovember 2012 and July 2013, 50 bps in January 2014 and 50 bps in March 2015 occurred earlier.
  • The surprise of the day was the Reserve Bank of India’s decision not to cut the 6.25% repo rate, the 5.75% reverse repo rate, or reserve requirements. The interest rates had been sliced 25 basis points on October 4th, but more importantly a demonetization on November 8th, taking INR 500 and INR 1,000 notes out of circulation has created a cash shortage and seems likely to curb near-term growth. The move was made to combat terrorism.

Australian real GDP fell 0.5% last quarter, much more than forecast, nearly halving on-year growth to 1.8% from 3.3%. Consumption and business investment performed worse in than in the second quarter. Australia’s construction PMI, which had slumped sharply in October, recovered 0.7 points to 46.6 last month but was below 50 for the third time in four months.

Japan’s index of leading economic indicators climbed 1% from 100 in September to 101 in October. More importantly, the index of coincident economic indicators also advanced a full point and earned an improved trend characterization of “improving.” The trend had been labeled “weakening” in every month from May 2015 through September 2016.

Japanese international reserves fell $23.5 billion in November on top of a $17.4 billion slide in October.

Deputy Bank of Japan Governor Iwata made remarks seemingly at variance with the thinking of Governor Kuroda. The latter had pushed earlier this year for a reorientation of the monetary easing framework with a new emphasis on the yield curve. But Iwata said the commitment to expanding the monetary base remains as strong as ever.

German industrial production grew only 0.3% in October. This rebound was only about a third as much as forecast following a 1.6% drop in September. Factory output rose a mere 0.1% in October, and overall industrial production was just 1.2% higher than the year-earlier level.

British industrial production sank 1.3% in October from September and 1.1% compared to a year earlier. Analysts were looking for a small monthly uptick.

NIESR estimates that British GDP during the three months to November increased 0.4%, same as the gain in August-October. British shop prices posted an unchanged 1.7% on-year slide, but the Halifax British house price index showed a 6.0% on-year increase in November, the most since August.

The French current account deficit in October of EUR 3.5 billion was slightly smaller than that in September despite an increased merchandise trade gap.

In the year to October, industrial production rose 0.7% in Norway but fell 10.3% in Denmark and 1.7% in the Czech Republic.

U.S. data show

  1. A further 4-basis point rise in the 30-year fixed mortgage rate last week to 4.27%, and a 0.7% drop in mortgage applications.
  2. An extended rise of the IBD/TIPP Optimism index in December, which also rose in October and November.
  3. No meaningful changes in job openings, hires and separations during October.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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