It’s what you might call a right royal rally today with European indices taking their cues from Asia surging strongly at the open. With average of gain of 2% across the board, the DAX is rising with all sectors in the green, but the consumer discretionary and telecommunications sector is taking the majority of the flow.
Upside moves like these certainly throw into sharp relief the longevity of bears and I would still maintain that these types of large swings, akin to 2008, in some respects are characteristic or a downtrend rather than a bull market. The materials sector is leading the gainers in the FTSE 100 this morning with Glencore (LONDON:GLEN) (OTC:GLCNF) reigning supreme, at one point holding the top spot on the FTSE and adding 5.4%. The miner quickly ceded the throne to its peer, Anglo American (LONDON:AAL) (OTC:AAUKY). A deal to sell its loss making South African platinum mines in a bid to improve its financial performance in the wake of the commodity price rout.
Hargreaves Lansdown (LONDON:HRGV) has seen its share price gain some 10% year to date and has been given an additional boost today with an upgrade from Numis. Earnings were a mixed bag with FY revenue topping expectations coming in at £294.2m against the consensus for £293.4m. Operating profit margin was at 67.3% versus 71.3% expected. The outlook for the group seems upbeat with management expecting 2016 to show a return to profit growth despite new services costs.
Ryanair (IR:RYA) (NASDAQ:RYAAY) has surpassed the €12 marker with chutzpah this morning, ascending 7% as the airline raised it FY forecast by 25% on stronger summer sales. The weakness in oil prices is surely helping and the likes of Flybe (LONDON:FLYB) (+3.7%), IAG (LONDON:ICAG) (+2.6%) and EasyJet (LONDON:EZJ) (+2.6%) are enjoying a tailwind effect also.
Manufacturing and industrial production are something of a bug bear in the UK economy continue to disappoint. Industrial production fell 0.4% month-on-month, giving rise to a mere 0.8% rise on the year, much lower than the 1.4% gain expected. Manufacturing also failed to deliver, falling 0.8^ month-on-month despite a consensus for a smaller gain of 0.2%. The pound has pared back some gains against the dollar as a result and now trades near the lows of the day at 1.5360.
Later we will see the NIESR GDP estimate – this is expected to remain static at 0.7%.
One has to question the sustainability of the types of swings we have been witnessing in equity markets as although many will try to justify a catalyst, there ultimately appears to be little rhyme nor reason to today’s melt up. There is perhaps a modicum of higher risk sentiment on the back of hopes for continued FOMC stimulus. At this juncture, we’ve seen the IMF and now the World Bank voicing their views on the risks of tighter monetary policy. Markets are currently pricing in a 30% chance of a rate hike this month.
China's Ministry of Finance on Tuesday evening stating it would carry out "stronger proactive fiscal policy" to counter headwinds to economic growth is also helping to buoy the bullish mentality this morning. Although, it must be said that this is quite a woolly statement from the Ministry.
Stateside, its JOLTS Day. Expectations are that 5.3m new jobs opened during the reported month, slightly higher than the last print of 5.25m.
We are presently calling the Dow higher by 150 points.
Looser monetary and fiscal booster for Japan
Japanese stocks were the major movers overnight. Nikkei stocks soared 7.71%, TOPIX followed with 6.40% rise.
US dollar surged to 120.75 against the yen as Japan PM Abe said to decrease the corporate tax by 3.3% over the next two years and BoJ’s Shirai emphasized the importance of keeping the monetary policy accommodative.
The restatement of loose fiscal and monetary policy measures dissipated the grey clouds over the Japanese markets. Although the conviction in Abenomics is on declining path on inability to bring the second and third arrows in the game, the promises of more liquidity and lower taxes could always make a shiny kneejerk boost. Fundamentally speaking, the 7.71% surge in Nikkei stocks could rapidly turn into empty market volatility.
The US and European equity indices are well bid as news of Central Bank support hit the wires. Will the global monetary loosening refrain the Fed from hiking rates at next week’s meeting? The market gives 30% volatility for a September Fed rate hike, 60% for a December hike.
BoC will only show teeth, but will not bite
The BoC gives policy verdict today and is expected to maintain the status quo. If the sliding oil price is the major drag to Canadian recovery, the BoC’s strategy to keep its policy loose could help the oil sector only to some extent. An additional 25 basis point cut on the benchmark rate is nothing but a feather compared to the heavy slump in oil prices. Cheaper financing will hardly justify reinvestment in the oil sector considering that the profitability threshold is at distant $70/80 per barrel.
Nevertheless, the BoC has no option but to keep the door open for further monetary stimulus, simply because it has become a sine qua non condition of the current ‘central bank game’. Showing teeth to the market is needed, yet the manoeuvre margin narrows as the rates tend to zero.