Just when equities looked to be staging a comeback, another round of bad news flow hits the headlines and eradicates the gains of the last few days. May was an ugly month for the markets, with shares hitting nine-month lows, the euro hitting a four-year low and June hasn’t started well either.
Yesterday’s quiet session in Europe, whilst the UK was closed for its bank holiday, saw a very quiet sideways move, but yet again the news of BP’s failed attempt to stem the leak from its oil spill has hit their shares hard and had a corresponding negative effect on other energy stocks. BP’s share price has hit a 14-month low this morning and now there will be more serious concern of a substantial reduction in their prized dividend, of which almost every pension fund in the land will have an interest in. Not only is this disaster causing substantial damage to the company’s reputation, but the thousands of barrels of oil spilling into the sea is a catastrophe for not just the local environment, but almost for the whole of the Gulf of Mexico.
The FTSE has also been hit by the softening Chinese manufacturing data, which whilst it still came in with a figure above 50.0 suggesting expansion, it fell much more than expected giving investors a bit of a shock and refuelling fears that the global economic recovery might be stalling. The People’s Bank of China continues to reign in lending, by requiring banks to hold more reserves in an attempt to tackle their high inflation, rather than actually raising interest rates and the action is likely to prevent overheating of the Chinese economy rather than stifle it. But investors around the globe still look to China to lead the global recovery and whenever there’s a bit of poor economic data from them, it usually leads to a sell-off in equities.
Today sees a raft of manufacturing data releases, with the Euro zone and UK this morning. The UK PMI is expected to show a mild decline along maintain underlying strength. Then later on the US ISM manufacturing is similarly expected to decline slightly.
Currency markets have also kicked back into life, after the extended UK weekend saw thin volumes and narrow trading ranges yesterday. The euro bears had taken the time off to sharpen their claws, as they’ve come back today and sold the euro this morning, which is back to the 1.2200 area. There’s been support for the single currency around this area over the last couple of weeks, so 1.2150 might hold again and a few buyers are creeping in expecting a bounce from here.
Germany unemployment numbers have come in better than expected this morning, which has lent a little support to the euro for now and the weakening economy has helped to boost their exports significantly, so while the euro bashing continues, a weaker currency is actually a good thing for the euro zone.
Cable is mixed this morning, just below the 1.4500 level and so the euro’s weakness has meant a further decline for EUR/GBP, which has dipped to its lowest level almost a year standing at around 0.8405. The 0.8400 is expected to provide some support, but a break below could open up 0.8250 or 1.2120 for those who prefer the GBP/EUR cross.
Gold is benefiting from all the doom and gloom in the headlines as it’s 4 bucks in the black this morning. The bulls will be hoping for a return to 1250 area soon to see if there’s enough momentum to take the precious metal to fresh new record highs, but they will be wary of the sort of corrections that can be had to the downside, with the last one being a retracement of 6.5%.
Crude prices are taking a knock along with equity markets as Nymex rejects the $75 level and stands at $72.50 at the time of writing. Once again the $70 level has provided support as it did at the end of May, so bulls will be expecting a return to $80 sometime soon, but that’s unlikely to happen if the current bout of risk reduction continues.