Wall Street follows European markets higher after worst week for two years
After a week which saw some $4tn wiped off the value of global stock markets, there is a better mood among investors at the moment.
European markets have moved higher, with the FTSE 100 up 1.3% , Germany’s Dax 1.7% higher and France’s Cac climbing 1.5%.
The recovery in US markets seen late on Friday is continuing as Wall Street opens, despite the continuing strength of US bond yields.
The Dow Jones Industrial Average is up around 300 points or 1.25%, while the S&P 500 and Nasdaq Composite are both up around 1%.
Here’s IG’s opening calls for the US markets:
Shares may be moving higher in the wake of Friday’s rebound on Wall Street, but US bond yields are also on the rise.
Normally bond yields fall when markets rise, but 10 year US treasury yields remain at four year highs. Fawad Razaqzada, technical analyst at Forex.com, said:
Have stocks and bond yields decoupled again? Friday’s reversal and today’s bullish follow-through in the stock markets have not been supported by rising government bond prices. As bonds have continued to sell-off, yields have pushed further higher. The benchmark 10-year Treasury yield has now climbed to above 2.9% for the first time since early 2014.
Should yields march further higher – which is quite possible with the upcoming US inflation and retail sales data to look forward to on Wednesday – then there is a possibility the equity markets could be in for another volatile week. Indeed, we think that far too much technical damage has been incurred in the indices for the bulls to make a quick comeback and with all guns blazing…So, Friday’s bounce may well prove to be a mere dead-cat bounce for stocks.
Meanwhile, Greece is watching the markets carefully with an eye to launching more bond sales before its final bailout program ends in August. Helena Smith reports from Athens:
After successfully raising €3bn from its sale of a seven-year bond last week, Athens is now looking to complete at least two more bond sales as part of wider steps to reinforce market access and show investors it can go it alone.
The Greek finance minister Euclid Tsakalotos has hinted that future issues could include a three-year bond – launched around the time of the March 4 general elections in Italy – and a ten-year bond. The government has announced plans to build a €19bn cash buffer that would allow the debt stricken country to cover debt repayments once the bailout programme expires.
The stock market falls we have been seeing are not unusual but did take longer than expected to happen, says Richard Stammers, investment strategist at European Wealth Group. And things are likely to remain volatile, he says:
We expect the short term to remain bumpy — possibly very bumpy. The definition of a correction is 10% off from the recent high and of a bear market, 20% off from the year high. So, whilst we are not in bear market territory, we need to recognise for every short term bounce there could be an equal and opposite slide back. Could we see lows of 15%? Quite possibly so, if we do, what should we do?
We stand by our view that the next bear market will be triggered by an expectation of the end of the business cycle. We may now be late cycle, and the end may now be sooner than many had expected, but we don’t think it is imminent. So, with the global economy broadly strong, and many companies delivering robust earnings, we think this is a buying opportunity.
Here is Reuters on the interest rate comments from Bank of England policymaker Gertjan Vlieghe:
Vlieghe said on Monday that a further rise in British interest rates was likely to be appropriate if a strong global economy and a labour market pick-up continued to offset Brexit headwinds.
“A further rise in interest rates is likely to be appropriate if all those trends continue and we are on a trajectory. It wasn’t just one hike in November and then we take a very long break,” he said at a panel discussion hosted by the Resolution Foundation, a think tank.
Another 4,418 jobs at collapsed Carillion have been saved, says the Official Receiver.
The staff involved are at prison facilities management, defence bases catering, and cleaning services. So far around a third of Carillion’s staff have had their employment confirmed.
Vlieghe says “I really am” at last seeing evidence of wage growth coming through, meaning it’s “likely to be appropriate” to raise interest rates
David Cheetham, chief market analyst at online trader XTB, said:
MPC voting member Gertjan Vlieghe has been speaking this morning on a panel discussing household debt in London and remarks such as “there is increased evidence that tighter labour markets are beginning to have upwards effect on wages” and that “if there is less credit headwind to the UK economy then we maybe ready for rate hikes” are certainly erring on the side of being hawkish. The comments are even more noteworthy given that Mr Vlieghe is deemed one of the most dovish voting members.
More from my colleague Richard Partington who is listening to the Bank of England’s Gertjan Vlieghe speak at the Resolution Foundation’s debt conference:
Vlieghe says banks are now well capitalised so next crisis (whenever it comes) the “collateral damage” to the economy won’t be as great
He also says the idea that low interest rates are to blame for rising house prices versus income “can’t be right” as US, Germany, Japan have had low rates and haven’t seen the same increases
Vlieghe says UK is in a disruption where it is “appropriate to put up interest rates”
He also says for unwinding QE by cutting the Bank’s balance sheet that “nothing has changed” on the idea that rates must rise before cutting. Closer to 2% bank rate is required
But. The Bank needs headroom to cut rates by about 1.5%. And if the lower bound is now close to zero as opposed to 0.5%. Then rates “don’t have to be” as close to 2%. Also says will watch the Fed unwinding closely for lessons.
The lower bound having changed when th BOE decided to cut rates from 0.5% to 0.25% in the August emergency rate cut following the Brexit vote
City firms need to do more to mitigate the risks of algorithmic trading, according to the UK’s financial watchdog.
Automated trading was suggested as on of the causes of the recent stock market turmoil, with computerised selling accelarating as share prices tumbled.
Automated technology brings significant benefits to investors, including increased execution speed and reduced costs. However, it can also amplify certain risks. It is essential that key oversight functions, including compliance and risk management, keep pace with technological advancements. In the absence of appropriate systems and controls, the increased speed and complexity of financial markets can turn otherwise manageable errors into extreme events with potentially wide-spread implications. As a result, algorithmic trading continues to be an area of focus for the FCA and other regulators across the globe.
In general, we are encouraged that firms have taken steps to reduce risks inherent to algorithmic trading. However, further improvement is needed in a number of areas. For example, some firms lacked a suitable process to identify algorithmic trading across their business and did not have appropriate documentation in place to demonstrate suitable development and testing procedures are maintained. In these cases, firms also lacked a robust and comprehensive governance framework.
Vlieghe says there is increased evidence that tight labour markets are beginning to have an upward effect on wages [another reason for a possible rise in rates]. He adds:
Gertjan Vlighe of the MPC says that households should be able to cope with higher rates, given that balance sheets are in better shape. But we still have much to learn about such relationships.
The Resolution Foundation is holding a seminar on household debt at the moment, with speakers including the Bank of England’s Gertjan Vlieghe:
Resolution Foundation chief economist Matt Whittaker says minority of borrowers “are set to suffer even with quite modest moves” in interest rates… up next, Gertjan Vlieghe
Vlieghe says households are on average releveraging (taking on more debt) after a period of deleveraging (cutting borrowing levels) at a time of eroding slack in the economy — therefore, there is a case for raising interest rates
Vlieghe says a continuation in rising debt levels would be unsustainable
The removal of some of the market’s recent complacency is no bad thing, says Joseph Amato at investment management group Neuberger Berman:
Before last week, the last meaningful market correction took place in 2016, when investors were concerned about the potential for a US recession, a China hard landing and low oil prices. But weakness was short-lived and markets have generally advanced since then.
The most recent pullback seems to have been triggered by the 2.9% wage inflation reading in the US and resulting fears the Fed would accelerate interest rate increases. But the loss was exacerbated by excessive investor complacency – something that has clearly been removed over the past week – as well as technical factors. This removal of complacency is a healthy development, as is the reduction in equity valuations…
On balance, we still expect global equity markets to rise this year. However, we expect the rate of increase to moderate. The risk of an outright bear market remains low, as bear markets normally coincide with recessions. We see a low risk of recession currently and expect growth in the global economy to continue gathering momentum.
However, we continue to think the market has under-estimated the scope for a rise in inflation this year – both in the US and globally. We also think the market has potentially misjudged the Fed’s desire to normalise interest rate policy. That said, rates should likely remain low, in absolute and historical terms.
The Vix volatility index, which had been pretty dormant for several months before surging last week, has slipped back this morning.
It hit as high as 50 last week but is now down 10% at 26 as some calm returns.
One of the sparks for the recent sell-off was the stronger than expected growth in US wages, which led to speculation that the Federal Reserve could raise interest rates more often than previously expected.
So one of the key events this week is likely to be the latest US inflation data, which could go some way to either easing or confirming those concerns. Rebecca O’Keeffe, head of investment at interactive investor:
Investors are breathing a sigh of relief after the torrid times last week, with European equity markets rallying this morning. Buying the dip has been a very difficult call in recent days, with every attempt at engagement punished in subsequent market moves, so investors will be hoping that this is a genuine buying opportunity. The key event of the week is US Consumer Price data on Wednesday, with investors anxious to determine whether the inflation fears that have helped to drive recent market moves have been overdone or if these concerns are justified.
A softer print on Wednesday would go some way to easing current investor fears. Wage inflation did not emerge in 2017 and even if you believe the data last week is a sign of things to come, usual lags mean this will not be evident in consumer prices until toward year-end or even into 2019.
One of the world’s biggest advertisers is warning it might take action against tech companies over online harassment, hate speech and other issues:
The consumer goods multinational Unilever is threatening to withdraw its advertising from online platforms such as Facebook and Google if they fail to protect children, promote hate or create division in society.
In a speech later today, Keith Weed, the Unilever chief marketing officer, will say that, as a brand-led business, Unilever “needs its consumers to have trust in our brands”.
European markets are holding on to their early gains, and with US futures suggesting a positive open on Wall Street, there is some cautious optimism around. But Connor Campbell, financial analyst at Spreadex, warned:
As proven time and again, these things can turn on a dime, and it is way, way too early to treat the day’s initial growth with anything but caution. Still, the FTSE climbed more than 1% after the bell, taking it towards 7170, with the CAC up 1.2% and the DAX leading the charge thanks to a near 1.7% surge, one that leaves the German index back above 12300. Importantly the Dow Jones currently looks set to follow in Europe’s footsteps, with the index’s futures pointing to a 170 point rise later this afternoon.
The forex markets were slightly more subdued. Both the pound and euro tried to claw back some of their recent losses against the dollar; the former rose 0.2%, but is still the wrong side of $1.385, while the latter jumped 0.3% to tease $1.227. Against each other, meanwhile, there was nothing to separate the two, with sterling flat around €1.128.
As forecast, European markets are benefitting from the rebound on Wall Street and have started the week on a brighter note after the recent turmoil.
The FTSE 100 is up 0.8% while Germany’s Dax has added 1% and France’s Cac has climbed 0.9%.
With the prospect of rising UK interest rates, Brexit concerns, and the continuing squeeze on real wages, UK consumers appeared to have kept their money in their pockets last month, according to a Visa survey. Reuters has the details:
British shoppers spent less last month than the year before, causing spending in January to fall for the first time since 2013, according to a survey which underscored many households’ caution about their finances and the approach of Brexit.
Visa, whose debit and credit cards are used for a third of payments in Britain, said on Monday that consumers stayed away from the traditional post-Christmas sales last month.
“Consumer spending entered the new year on a downbeat note, falling for the eighth time in the past nine months, as Britons continued to cut back on spending,” Visa’s chief commercial officer, Mark Antipof, said.
A fall in car sales weighed on the overall sales figures too. But there was better news for hotels and restaurants — as well as for hair salons and sellers of beauty products, as consumers looked for small treats for themselves.
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
After last week’s market turmoil, which saw Wall Street enter correction territory (losing 10% from its recent peak) and some $4trn wiped off global share values, investors will be hoping for some respite this morning.
For a market that has enjoyed steady gains and fairly low volatility over the course of the past two years the steepness of the falls speaks to a complacency that has been prevalent for a while now and which appears to have been shattered in the wake of a surge in volatility.
How this plays out over the coming days depends on whether the rebound we saw on Friday can translate into some form of base for a continuation of the uptrend that has been in place for the last nine years. This may well depend on whether we see further increases in bond yields, or a rise in interest rate expectations from other central banks around the world.
There had been a lot of complacency built up in markets over a long time, so we don’t think this shakeout will be over in a matter of days. We’ll probably have a much bigger shakeout coming.