European markets end higher but UK slips back
After a bright start European shares came off their best levels, as the crude price slipped back from its highs after the Baker Hughes rig data. But, apart from the UK market, they still managed to end the day in positive terrirtory after a strong start on Wall Street. The recent rally follows the revival in the oil price on hopes that major producers will agree an output freeze, and the dovish comments from the US Federal Reserve about the prospect of further interest rate rises, which has in turn weakened the dollar. Tony Cross, market analyst at Trustnet Direct, said:
The FTSE-100 may have come within 5 points of those highs for the year, but the upward momentum failed to last as a lack of good news continues to plague the market – at least in London. It’s interesting to note that markets on mainland Europe and in North America continue to wriggle higher, but with factors like oil failing to extend its gains also in play and a resurgent pound hitting sterling-denominated assets in general, the mood is decidedly muted.
The final scores showed:
- The FTSE 100 fell 11.48 points or 0.19% to 6189.64, but still ended up 0.8% on the week
- Germany’s Dax added 0.59% to 9950.80
- France’s Cac closed 0.44% higher at 4462.51
- Italy’s FTSE MIB edged up 0.02% to 18,611.34
- Spain’s Ibex ended 0.81% better at 9051.1
On Wall Street, the Dow Jones Industrial Average is currently up 88 points or 0.5%.
On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back next week.
Here’s the Baker Hughes rig count showing oil rigs up by one, but gas rigs falling:
Remember when oil rig counts were 1,609 vs 387 today? https://t.co/haql9Iwfsj
— Dominic Chu (@TheDomino) March 18, 2016
The number of oil rigs drilling in the US has climbed for the first time in 12 weeks, according to the Baker Hughes rig count, albeit by just one rig.
The news has sent crude prices falling again after their early gains. Brent crude is now down 0.2% at $41.45 a barrel, well down on its earlier level of $42.54. West Texas Intermediate, the US benchmark, is 0.5% lower at $39.96 a barrel.
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Here’s ratings agency S&P on Russia:
S&P affirms #Russia's BB+ rating & neg outlook. Expects 1.4% GDP contraction this year, and modest growth in 2017. pic.twitter.com/dRAmfjBsEa
— Holger Zschaepitz (@Schuldensuehner) March 18, 2016
S&P said Russia’s ratings remained constrained by the weak political institutions which are impeding the economy’s competitiveness. On sanctions, it expected them to remain in place over its forecasting period.
Earlier we reported the idea that central bankers meeting in Shanghai last month may have made a secret deal to prevent the dollar strengthening any further.
But economist Julian Jessop at research group Capital Economics is not convinced:
The dollar’s further slide since this month’s [US Federal Reserve] meeting has increased speculation that G20 officials meeting in Shanghai last month came to some sort of deal to end the US currency’s strength. But this speculation makes no sense on close inspection.
The speculative story runs something as follows. Central bankers in the advanced economies are worried about the market volatility that might be caused by further strength in the US dollar. Specific concerns presumably include the impact on US corporate earnings, additional weakness in commodity prices, financial strains in emerging markets with large external debts, and a greater risk that the [Chinese central bank] would undertake a major devaluation of the renminbi. In this narrative, central bankers have agreed to coordinate monetary policies to cap the dollar against other major currencies.
Consistent with this, the communiqué said a little more than usual on currencies, adding a new commitment to “consult closely on exchange markets”. What’s more, the dollar has indeed weakened against both the euro and the yen since the meeting concluded in late- February. In turn, this has allowed the renminbi to fall slightly further on a trade-weighted basis, despite a small appreciation against the US currency.
However, we doubt that Shanghai marked a lasting turning point. For a start, the new language in the communiqué went only very slightly further than previous warnings about “excess volatility and disorderly movements in exchange rates” and commitments to “refrain from competitive devaluations”. Moreover, the dollar had peaked against both the euro and (particularly) the yen some months earlier. Above all, since the G20 the ECB has unveiled a package of bold stimulus measures that might have been expected to weaken the euro.
Admittedly, the euro still rebounded after President Draghi’s remark that ECB interest rates have may have bottomed out, but it is hard to believe that was the outcome he intended. Indeed, the equity markets of both the euro-zone and (especially) Japan have stuttered as a result of the appreciation of their respective currencies. ECB officials have since reinforced the message that policy could be loosened further if required. And while the Bank of Japan did opt to leave monetary policy settings on hold in March, it left plenty of room for additional easing next month.
We also think that the markets have read too much into the [Fed’s] latest projections. The median forecast of participants implies that they only expect to raise rates twice this year, but the mean forecast is still consistent with up to three hikes. Either outcome would be a faster pace of tightening than currently priced into fed funds futures. The Fed’s apparent dovishness could also soon evaporate if inflation pressures continue to build, even if this means renewed dollar strength.
The upshot is that we continue to expect the US currency to resume its climb against the euro and the yen in the coming months, as monetary policy divergence comes back to the fore. The latest survey shows that around 80% of foreign-owned UK financial assets were held in either the euro-zone or the US in the middle of last year, up from around 70% a decade or so ago. (See Chart.) It also reveals that the amounts of UK financial assets that are held in the euro-zone and the US are broadly similar, even though the UK does approximately four times as much trade with the euro-zone than it does with the US.
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Breaking news
Just ahead of the bid deadline, Sainsbury’s has unveiled its £1.4bn offer for Home Retail Group, including a special dividend. It values the Argos owner at 173.2p a share.
Sainsbury’s says that after due diligence it expects a higher level of synergies from the deal, up from £120m to £160m.
Wall Street is moving sharply higher, German and French markets are in positive territory but the FTSE 100 has fallen back into the red. Chris Beauchamp, senior market analyst at IG, said:
Risk appetite is fading as the session heads to its close, with the FTSE 100 back in the red, ten points lower from the open.
The 6200 level continues to stand in the way of the FTSE 100, with the five-week rally stymied for lack of good news. European markets are still in positive territory, although they are also off their highs. A rally needs momentum, and the lack of it on the FTSE over the past few sessions sends a warning that the last two weeks of March may not see the same bullish atmosphere that dominated of late. Looking forward, however, a weaker US dollar, stronger commodity prices and supportive central banks would seem to bode well for more gains into April and May, particularly given the way dips in oil continue to be furiously bought.
Here’s our latest Home Retail story, from Sarah Butler:
Sainsbury’s is on course to take over Home Retail Group for £1.4bn after South African retail group Steinhoff said it had ditched plans to make a rival bid for the Argos owner.
Steinhoff, which owns furniture chains Bensons for Beds and Harveys in the UK, released a statement to the stock exchange in London confirming its withdrawal on Friday afternoon.
Home Retail Group’s shares dived about 11% and Sainsbury’s shares fell just over 3% on the news that Steinhoff had withdrawn.
Markus Jooste, CEO of Steinhoff, said Home Retail was a “compelling business with unique attributes that remains attractive on many fronts” and expressed appreciation for the professional manner in which the company had handled the bid process.
But he added: “Having concluded our due diligence review and ancillary discussions, we have evaluated our findings against our investment criteria and today come to a decision not to proceed with a firm intention announcement and offer.”
The full story is here:
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Steinhoff did have other things on its plate - its French business Conforama has agreed to buy electrical retailer Darty.
Here’s Sarah Butler on the South African group’s other deals from our story earlier:
Steinhoff, which has an international retail empire, is currently working on a number of other deals. Some analysts believe Steinhoff may lose interest in Home Retail if the price gets too high as it also currently bidding for electrical goods retailer Darty in France and is also rumoured to be looking at Australian electronics chain The Good Guys.
It is also backing the expansion of Pep & Co, a new budget clothing chain being developed by Andy Bond, the former boss of UK supermarket chain Asda.
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Home Retail shares have fallen 6% after the sudden end to the bid battle for the Argos owner.
Sainsbury’s shares, by contrast, have climbed 0.3%, on the basis that it may not now have to raise its offer to £1.5bn.
Steinhoff withdrawn their offer for Argos owner Home Retail Group - there's a shocker! So Sainsbury's doesn't have to up its bid..
— Sarah Butler (@whatbutlersaw) March 18, 2016
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Steinhoff will not make offer for Home Retail
Breaking news:
South Africa’s Steinhoff has just announced it will not make an offer for Argos owner Home Retail ahead of a 5pm deadline., clearing the way for Sainsbury’s.
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As well as weak consumer confidence figures from the US, there has also been downbeat data from Belgium and the Netherlands.
In Belgium confidence fell for the third month to a five month low of -7 in March, while in the Netherlands it slipped to a 13 month low of -4. Economist Howard Archer at IHS Global Insight said:
Early signs for consumer confidence across the Eurozone in March are not good, with declines in the Netherlands (to a 13-month low) and in Belgium (to a 5-month low). This will fuel concern over whether consumers will help Eurozone GDP growth to pick up in the near term from current lacklustre levels – even though the fundamentals for consumers still look pretty decent.
With the race to the White House well underway, politics could be playing a part in the US confidence figures, says James Knightley at ING Bank:
Both the current conditions and the expectations components dropped, which is a bit disappointing given the rebound in equities and the strength in the labour market
It could partially be down to the rise in gasoline prices from around $1.70 a gallon as the mid-point for the national average for February versus $1.97 a gallon as it stood yesterday (AAA data).
It’s possible that politics may also be weighing on sentiment given the preponderance of negative sound-bites. Nonetheless, we expect consumer spending to hold up given positive real wage growth and rising employment. Interestingly one year and 5-10 year inflation expectations rose to 2.7%, which is supportive of the Fed rate hike story.
U of Michigan #consumersentiment fell for the 3rd consecutive month (90.0 vs 91.7) as current & future outlooks both dimmed
— Joseph A. LaVorgna (@Lavorgnanomics) March 18, 2016
U of Michigan #inflation expectations firmed as consumers expected 1yr and 5yr prices to rise 2.7% compared to 2.5% previously
— Joseph A. LaVorgna (@Lavorgnanomics) March 18, 2016
The survey’s chief economist, Richard Curtin, said:
Consumer confidence eased in early March due to increased concerns about prospects for the economy as well as the expectation that gas prices would inch upward during the year ahead.... While consumers do not anticipate a recession, they no longer expect the economy to outperform the 2.4% rate of economic growth recorded in the past two years.
US consumer confidence disappoints
US consumers were less confident in March than expected, according to the latest University of Michigan survey.
Its index fell from 91.7 in February to 90, down on the expected figure of 92.2.
Positive signs from the Chinese economy are also giving some support to markets, particularly commodity companies as metal prices move higher.
Copper climbed to a four month high after Chinese house prices rose at their fastest rate for almost two years in February. According to Reuters figures, prices climbed 3.6% compares to 2.5% in January.
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US markets open higher
Wall Street has carried on where it left off on Thursday, when the Dow Jones Industrial Average turned positive for the year.
The Dow is up another 53 points or 0.3%, while the S&P 500 has opened 0.15% higher and Nasdaq 0.22% better.
Rising oil prices, along with the US Federal Reserve’s dovish comments on interest rates this week, is helping sentiment among investors.
At the moment however, oil prices are far from sliding. Quite the reverse.
Brent crude is up more than 2% at $42.43 a barrel, its highest level since December. Investors are hoping that Opec and other oil producers can agree to freeze output, despite reluctance from Iran which has just returned to world markets.
At the same time there are signs the supply glut may be stabilising. The US Energy Information Administration said this week that crude inventories rose by 1.3m barrels last week, but this was less than the 3.4m increase analysts had been expecting.
Also helping crude is weakness in the dollar following the US Federal Reserve trimming its expectations for further interest rate rises this year. A fall in the dollar makes oil more affordable to holders of other currencies.
The slide in the oil price has driven down Canada’s inflation rate.
Prices were 1.4% higher year-on-year in February, down from 2% in January, and 0.2% higher month-on-month.
#BREAKING: Lower gasoline prices push Canada's inflation rate lower in February
— CTV News (@CTVNews) March 18, 2016
Back in the markets, shares in developing countries have hit their highest levels since last December.
The benchmark MSCI Emerging Markets index (MSCIEF), is up 0.8% on track for its third third weekly gain in a row.
There’s general relief that the US Federal Reserve is pledging to be cautious when normalising monetary policy; calming fears of capital outflows from emerging markets [EM] into the dollar.
Per Hammarlund, chief EM strategist at SEB, explains:
This latest rally has been driven by renewed appetite for EMs due to fewer rate hikes in the U.S
Speaking of Russia.... Vladimir Putin’s new rating agency is now open for business.
The venture, called ACRA, is Moscow’s attempt to hit back at the Western rating agencies which recently downgraded Russia to junk status.
Russian officials say ACRA will give valuable new insight into the country’s corporations, at a time when Moody’s and Fitch are reducing their monitoring of the country.
However.... there’s understandable cynicism about ACRA’s independence.
As Paul McNamara of asset management firm GAM puts it (via Reuters):
“Any Russian agency would undoubtedly be regarded as being in the pocket of the Kremlin.... [It’s] a standard response to being downgraded. Nobody in the market cares.”
More here:
Vladimir Putin Starts His Own Ratings Firm ...https://t.co/FD9ognoWev via @business
— Caroline Hyde (@CarolineHydeTV) March 18, 2016
Newsflash from Moscow: The Russian central bank has left interest rates unchanged at an eye-wateringly high 11%.
With inflation around 7%, the Bank of Russia clearly felt unable to ease monetary policy even though the country is in recession.
In a statement, it warns that inflation risks remain high, despite recent stabilisation in the financial markets. And inflation could get a kick higher this summer due ‘base effects’ (because the oil price will no longer be lower than a year ago).
So rates could remain high for longer than expected.
"Bank of Russia may conduct its moderately tight monetary policy for a more prolonged time than previously planned"https://t.co/GeUalB1dOo
— Katie Martin (@katie_martin_fx) March 18, 2016
This chart shows how the ECB has already driven interest rates down to record lows, putting a radical move like ‘helicopter money’ on the agenda:
#ECB's Praet more open to depo rate cuts and even 'helicopter money'. https://t.co/7PVL7KGEpW pic.twitter.com/YZjTWX18UN
— Holger Zschaepitz (@Schuldensuehner) March 18, 2016
ECB's Praet hints at rate cuts and helicopter money
A senior European Central Bank policymaker has excited the markets by hinting that eurozone interest rates could be cut again.
Peter Praet, an ECB executive board member, told the La Repubblica newspaper that further stimulus measures are possible.
Last week’s new package of interest rate cuts, cheaper credit and quantitative easing is not the final throw of the dice, Praet insisted.
He said:
This re-composition of the tool-box does not mean that we have thrown away any of our tools. If new negative shocks should worsen the outlook or if financing conditions should not adjust in the direction and to the extent that is necessary to boost the economy and inflation, a rate reduction remains in our armoury.
And if all else fails, Praet says the ECB could even embark on ‘helicopter money’ and physically press cash into the public’s hands, to force inflation up.
Asked if “in principle the ECB could print cheques and send them to people?”, Praet says:
Yes, all central banks can do it. You can issue currency and you distribute it to people. That’s helicopter money. Helicopter money is giving to the people part of the net present value of your future seigniorage, the profit you make on the future banknotes. The question is, if and when is it opportune to make recourse to that sort of instrument which is really an extreme sort of instrument.
There are other things you can theoretically do. There are several examples in the literature. So when we say we haven’t reached the limit of the toolbox, I think that’s true.
Praet on helicopter money: "Yes, all central banks can do it. You can issue currency and distribute it to people."
— Frederik Ducrozet (@fwred) March 18, 2016
This commitment to fresh stimulus has weakened the euro, sending it down 0.3% to $1.127, and also pushed shares higher in France and Germany.
This is a great @repubblicait interview with #ECB's Praet. Long & extensive. No topics left aside. A must-read: https://t.co/aYLCvbcmrJ
— Maxime Sbaihi (@MxSba) March 18, 2016
Europe still has a deflation problem, according to the latest measure of prices charged by German manufacturers at the factory gate.
German producer prices fell by 3% year-on-year in February, a bigger fall than expected, partly due to a 9.4% slump in energy prices.
#Producerprices in February 2016: –3.0% on February 2015 https://t.co/iLIjFJcBMJ pic.twitter.com/7WeSgxMarf
— Destatis news (@destatis_news) March 18, 2016
Marilyn Watson at fund manager BlackRock told Bloomberg TV this morning that the US dollar should stabilise as traders take stock of recent developments.
She believe investors are less worried about a slump in the Chinese yuan, and have also taken the Federal Reserve’s recent cautious tone on board.
Tony Cross, Trustnet Direct’s market analyst, agrees that the Fed is supporting the markets:
Wednesday’s dovish note by the Federal Reserve may be continuing to lend support to global equity markets, with a weaker US dollar encouraging a risk-on mindset amongst many.
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European markets are pretty stable this morning, after seeing Wall Street hit 2016 highs last night.
Mining companies are continuing to push higher, due to the weaker US dollar pushing up commodity prices.
The best and worst performers in Europe this morning ..
— Squawk Box Europe (@SquawkBoxEurope) March 18, 2016
very much Miners vs Banks so far! #markets pic.twitter.com/AXeXoTTVCy
Money is still pouring into Japanese government debt today, following the recent imposition of negative interest rates.
It’s sending the rate of return on 10-year bonds to a new record low, further below zero.
Japan 10-year yield drops to record, below negative deposit rate pic.twitter.com/fNmKBuf5Bg
— Francine Lacqua (@flacqua) March 18, 2016
Did central bankers agree a secret deal in Shanghai?
Speculation is swirling that central bankers have made a secret deal to prevent the US dollar strengthening any further.
The theory is that global policymakers cooked up a plan when they met in Shanghai in last month, amid worries that the surge of money into the greenback was destabilising markets and fuelling deflation (by driving commodity prices downwards).
Chris Weston of IG explains:
To any conspiracy theorists it’s all become quite clear. There is a global coordinated central bank effort to weaken the US dollar in play.
He points out that many central banks have surprised the markets with fresh stimulus in the past few weeks (hello, Mario Draghi), or been much more dovish than expected (take a bow, Janet Yellen):
Whether it’s the People’s Bank of China easing the Reserve Ratio Requirements (RRR) by 50 basis points, the RBNZ cutting its cash rate by 25 basis points (very much out of consensus), or the ECB moving to a focus on credit markets and going significantly above and beyond expectations. Of course, then we also have the Fed, who missed the economists’ modestly hawkish playbook by about as wide a margin as we will likely see.
Joachim Fels, global economic advisor at bond-trading firm PIMCO, also suspects something is afoot.
He told Bloomberg that:
“There seems to be some kind of tacit Shanghai Accord in place.”
“The agreement is to roughly stabilize the dollar versus the major currencies through appropriate monetary policy action, not through intervention.”
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Asia shares hit 2016 highs as US dollar weakens
The promise of stimulus measures and easy monetary policy is sending world stock markets rallying.
Last night, the Dow Jones industrial average turned positive for the year, putting the turmoil of January and February behind it.
And that has fed through to Asia, where most markets have posted gains.
The weaker US dollar is helping. It suffered its biggest losses since 2009 yesterday, after the US Federal Reserve admitted on Wednesday that it only expects to raise interest rates twice this year, not four times as previously pencilled in.
Global currencies soar, defying central bankers https://t.co/gyFVuWcoS6 pic.twitter.com/1QLwk88Mry
— Wall Street Journal (@WSJ) March 18, 2016
Reuters has the details of today’s Asian action.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.8%, entering positive territory for the year for the first time. It is up 2.3% this week,and has surged 10.4% this month. The Hang Seng index was up 0.6 percent, heading for a weekly rise of 3.6%.
China’s Shanghai Composite index and CSI 300 climbed about 1.9%,and were set for gains of about 6.4% for the week.
Japan’s Nikkei is missing out on the rally, though. Shares are being dragged down because the yen has risen against the US dollar, hurting Japanese exporters and hurting hopes of higher inflation.
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Introduction: Draghi gives eurozone leaders a blast
Good morning and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It looks like another day dominated by talk about the global economy, and central banks’ ability to improve the situation and ward off a crash.
But Mario Draghi, the head of the European Central Bank, has given world leaders a clear message -- don’t rely on us for everything.
Speaking to reporters in Brussels last night during an EU summit on the refugee crisis, Draghi revealed he had told politician to do their bit and reform their economies.
The ECB chief said:
“I made clear that even though monetary policy has been really the only policy driving the recovery in the last few years, it cannot address some basic structural weaknesses of the eurozone economy.
“For that you need structural reforms, mostly driven to raise the level of demand, public investments and lower taxes. Even more importantly, one needs clarity on the future of our ... monetary union.”
Draghi is notorious for avoiding reporters on these occasions; he’s got a great ability to move like a cat through the press who doorstep these summits.
So when he stops to talk, he really wants his message out there. And perhaps he’s worried that the new stimulus package announced by the ECB last week is going to encourage EU leaders to take their eye off the ball.
Also coming up today....
UK supermarket chain Sainsbury, and South Africa’s Steinhoff International, both have until 5pm GMT to launch a new takeover bid for Argos, the British catalogue retailer:
Theres not much in the economic calendar, but we do get the latest count of US oil rigs this afternoon. That may show that more producers bailed out, due to the pressure of lower crude prices.
- 12.30pm: Canadian inflation for February
- 2pm: The University of Michigan survey of US consumer confidence
- 5pm: The US Baker Hughes US rig count
We’ll be tracking all the events through the day
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