European indices are for the most part slightly higher this morning with the FTSE lagging and trading down around 0.18%. While basic resources are catching a bid, not surprisingly given yesterday’s fairly overwhelming rout, there is still a certain degree of risk off to be felt with investors very much on the defensive and the utilities sectors capturing most of the flow.
Glencore (LONDON:GLEN) is the top riser, adding 9.56% and ultimately defining the old adage ‘coming off a very low base’. What is notable is that copper prices do appear to be stabilising a little with the $2.20/lb mark still holding firm as a decent demand zone. From a technical perspective, copper is not oversold but looks to be displaying a degree of bullish divergence which could be a precursor to a near term bounce in the metal. Given that the price has declined over 10% in the past 12 days, a squeeze higher cannot be ruled out from here. The question is whether it will come in time or indeed in enough substance to allay Glencore’s demise. Yesterday’s move was doubtless overdone on absolutely no news.
Cutting debt and selling assets is one thing but unless the commodity story is heading towards a happier ending, investors will continue to punish the share price and only serve to make any management actions futile.
Oil prices are also steadying and again the propensity for an upside move is keeping oil stocks marginally elevated this morning with Shell (LONDON:RDSa) adding 2.8% and BP (LONDON:BP) up almost 1% on the day. Oil has been trading in a tight range this month and may well be coiling up for a big move. The catalyst will most likely be dollar related rather than the supply/demand drivers. The dollar index has similarly been range bound and fairly sideways in terms of price action. The major moving averages have tightened and price action in trading in confluence. Given that the expectation for a rate hike in December have diminished quite substantially over the past few days, the bias may well be for a lower greenback which would help support commodity prices.
Later sees the release of US consumer confidence. This is expected to weaken from the last outing to 96.2 from 101.5
You have look pretty hard for a bright spot today but UK housing activity has provided it. BOE mortgage approvals for house purchases rose to a 19 month high in August. The forecast range was for 69,000 to 72,000 and the number came in close to the top of the consensus range. Clearly the spectre of higher interest rates in the UK has provoked some activity here. The 8-1 split within the MPC at the last meeting may well be set to show further dissent at the October policy meeting and while cable is now trading at $1.52, we may well look for a rebound on heightened expectations and the adoption of a more hawkish outlook from the central bank. A slowdown in building activity along with the general malaise in global growth may however, akin to the FOMC’s recent reticence, be the barrier to normalisation. Governor Mark Carney speaks later this evening at Lloyds (LONDON:LLOY) of London. Forward guidance thus far hasn’t exactly been a resounding success but he may help to provide direction for sterling.
We call the Dow 39 points higher to 16040.
Yen’s strength could be a money spinner for the BoJ doves
Nikkei 225 and TOPIX have been the falling stars in Asia; the yen gained against the US dollar, the euro and the pound.
If the risk aversion has got its finger in the recent yen appreciation, a decent month/quarter-end demand is also supportive of a stronger yen walking to the end of September.
Soft US yields and inert BoJ could lead to a further appreciation in yen in the short-run as the market is now trimming the short positions. A break below the 119-support could easily bring 118.30/15 (Fib 23.6% retrace on Aug sell-off) and 116.18 (Aug dip) back on the table.
This being said, the macro and real money names will soon find interest in entering long USD/JPY positions on the dips, once the market is clean from the month/quarter-end yen demand.
With the deterioration in inflation expectations and the slowdown in Chinese growth, the recent appreciation in yen could easily turn into opportunity to strengthen the short yen positions – as it has been the case in the past. Given that the 120-level acts as a powerful magnet, the strength in yen could be a money spinner for the BoJ doves.
Against the USD, the yen needs to depreciate within 123-125 band to help improving the inflation expectations. Otherwise, the asthmatic Japan market will be demanding for further monetary stimulus, its inhaler. And if the BoJ leaves the yen on its own, further appreciation could jeopardise BoJ's efforts to revive inflation. While against the euro, a consolidation in 135-138 zone is possible with the increasing funding demand in the euro. In the mid-term however, a setback to 130 is a reasonable projection considering the ECB’s determination to prevent too much appetite in euro.