The nervousness best defines the general sentiment in the European markets this Monday morning, following the terrific terrorist attacks in Paris on Friday.
The risk aversion in the European markets drove the capital from equity to sovereign markets. The DAX and the CAC 40 are 0.30% down at the time of writing. Accor (PA:ACCP) SA (-6%) lead losses in Paris, Lufthansa (DE:LHAG) is down 2.62% in Frankfurt, Tui (DE:TUIGn) (-3.35%) and Intercontinental Hotels Group (L:IHG) (-2.35%) suffer early losses. Rising terrorist threats will certainly impact tourist arrivals to big European cities as Paris, London and Berlin before the festive Christmas period.
On the other hand, the rising geopolitical tensions between the West and the IS, the reinforcement of security measures in big European cities and the air strikes in Syria are expected to boost government spending on police and military and could give a bump to short-term domestic demand. The long-term impact is contingent on the gravity of the situation.
The flight to security has been favourable for the UK and European sovereigns, gold surged to $1198.
The FTSE diverges positively from the DAX and the CAC. Miners lead gains in London; Anglo American (L:AAL) (+3.46%), Glencore (L:GLEN) (+3.30%), BHP (+3.03%), Fresnillo (L:FRES) (+2.3%) are better bid on rising safe-haven demand in precious metals. Nonetheless, the copper futures trade below $2.15/lb. Chile’s Codelco, biggest copper producer, announced its plans to lower fees by a significant 28% on sales to China hoping to give a boost to the Chinese demand. As the value of copper used as collateral decreases, the banks will be urging companies to top up their collateral or to liquidate their position to pay their loans. Should the borrowers chose to pay back their debt and walk away, the copper prices may well continue weighing on miners with exposure to the copper market as BHP, Glencore and Rio Tinto (L:RIO).
The euro remains under decent selling pressure against the US dollar and the pound. EUR/USD has legged down below 1.07 as the mid-term direction points at a further slide to 1.0500/1.0450 zone. Hawkish Fed expectations rise before the FOMC minutes and traders will certainly continue chasing top selling opportunities to strengthen their euro short positions. A potential rate hike by the Fed in December could be accompanied by an additional expansion from the ECB. Such scenario could even bring the parity on the radar.
Japan GDP contracts
In Japan, Q3 GDP contracted by 0.8%q/q annualised versus -0.2% expected and -1.2% printed previously. USD/JPY and JPY crosses were better bid on the weak economic data. Japan’s Economy Minister Amari said that the ‘economy is recovering moderately despite some weakness, private consumption and CAPEX to rise’ adding that unions should ‘seek 3% wage hike to beat deflation.’ We are clearly not there yet and the market is still hoping for additional stimulus from the BoJ to stay up to the speed.
USD/JPY and JPY crosses were better bid in Tokyo, while Japanese stocks refused to gains. Nikkei 225 lost 1.04%. Although the lack of momentum in US yields is a minor drag on US dollar appreciation, an advance to 125.00/85 seems reasonable should the Fed gives clear signals of an orthodox move before the end of the year.
Decent option barriers in USD/JPY trail below 123 at today’s expiry and could cap the upside in the immediate future.