The European market (Stoxx-600) closed around 336.58 Thursday, crumbled by almost -1.60% on lingering Fed turmoil, lower oil and higher EUR; the market catches up the overnight plunge in the Wall Street which slips Wednesday in a rollercoaster day of trading after less dovish than expected hike by Fed as it set to hike further twice in 2019 against market expectation of no hike or only one hike.
The market is concerned that the Fed’s hawkish monetary policy could cause a US/global economic slowdown in the coming days on higher borrowing costs coupled with lingering Trump trade war and European as-well-as US political jitters. The Eurozone EPS growth for 2018 is now being slashed to around 4.4% from earlier peak of 10%.
The US market tumbled further late Wednesday on more hawkish talks by Fed’s Chair Powell, commenting that the Fed will not alter its B/S tapering pace in any way. As highly expected, the US Fed has hiked Wednesday unanimously its benchmark interest rate by +0.25% to +2.50% but predicted 2 more hikes in 2019 in its latest Dec dot-plots against 3 hikes in the Sep dot-plots.
On Wednesday, the European market (Stoxx-600) surged by +0.31% on Italian budget optimism and hopes of a dovish hike by Fed.
On Thursday, Europe was dragged by energies as oil plunged on global stock market risk-aversion and further dragged by commodity names (miners and materials) on overnight stress on commodity currencies coupled with worries about China, EU, and US economic growth after FedEx (NYSE:FDX) guidance warning on geopolitical and trade jitters from China to America. FedEx is one of the bellwethers for the global economy.
Also, techs were in stress following their US counterparts on a fresh Facebook (NASDAQ:FB) data leak allegation, while banks & financials were in the back foot on lower Bund yields, negative for their business/lending model.
The export-heavy European market was also dragged by higher EUR/GBP/local currency on broad weakness in the USD despite Wednesday’s less dovish than expected hike by the Fed. The primary reason behind USD weakness was the US stock market plunge (risk-aversion), the concern of a slowing US economy amid higher borrowing costs and increasing bond yield flattening/inversion, lack of year-end USD demand as a funding/hedging currency and an unexpected hike by Swedish central bank (Risk Bank) form -0.50% to -0.25%.
Another headwind for the USD is a stock market capitulation and possible US economic slowdown in the coming days because of Fed and many other factors like a trade war would be negative for Trump’s 2020 Presidential bid and fiscal stimulus effort. The US dollar index (DXY) slumped around -0.80%, while EURUSD jumped almost +0.95% to a session high of 1.1485, GBPUSD surged by almost +0.75% to a high of 1.2707.
Germany 30
Germany’s export-heavy and China/Brexit sensitive DAX-30 plunged -1.44% to close around 10611.10 (-155.11); it was dragged by techs, retailers, consumer discretionary and banks & financials. Deutsche bank plunged on reports of a fresh regulatory probe amid another allegation of the bond market trading cartel.
Pivot: 10650 Support: 10575 10480 10400Resistance: 10705 10765 10835 Scenario 1: STRONG ABOVE 10650 AND SUSTAINING ABOVE 10705-10835, DAX-30 MAY FURTHER RALLY TO 10880/10995/11040/11125 IN THE NEAR TERM Scenario 2: WEAK BELOW BELOW 10625-10605 AND SUSTAINING BELOW 10575-10400, DAX-30 MAY FURTHER FALL TO 10360/10280/10220/9900 IN THE NEAR TERM Comment: SHORT TERM RANGE 9900/10400-10650/10995
Airbus Group (PA:AIR)
France’s CAC-40 tumbled -1.78% to close at 4692.46 (-84.99) after making a session low-high of 4685.61-4719.61. France was dragged by industrials, techs, banks & financials, oil & gas (energies) and a plunge in Airbus. Another company Norsk Hydro (NHY) tumbled after the US lifted its sanctions against NHY’ rival Rusal.
Airbus also dragged the overall European market after a report that the US is investigating into allegations of corruptions, which may costs the airlines billions of dollars in fines. Airbus is already under regulatory probe in the UK and France. Airbus closed around EUR 83.33, plunged by almost -4.44% after making a session low-high of 78.83-85.60. Airbus crashed almost -25% in the last three months (Oct-Dec’18-till date).
Italy 40
On Thursday, Italy’s FTSE MIB-40 stumbled -1.93% on renewed worries about its fiscal discipline and finances as the EC has approved the budget deficit projection of 2.04% for 2019. On Wednesday, Italian bank stocks rallied and Italian Bund yield tumbled on Italian budget truce after the EC decided against launching a disciplinary procedure against Italy over its budget and said that concessions by Italy on its budget meant the country didn't warrant triggering the excessive deficit procedure. The EC’s deputy budget commissioner Dombrovskis said the agreement that had been reached would lead to an expected budget deficit next year of 2.04% compared with 2.4% of Italy’s original plans.
Actually, the figure of 2.04% budget deficit is almost at mid-point of the EC’s target of 1.6% and Italy’s ambition of 2.4%. The EU/EC does not want another Brexit from Italy (Italexit) and Italy is also not in a position for an exit out of the EU or face consistently higher Bund yields/spreads.
Further on Italian budget drama, EC’s Dombrovskis warned that the budget deal with Italy envisaging no structural deficit change is the “borderline” and Italy’s 2019 GDP forecast has been revised down to +1.0%.
Italy’s PM Conte said, “Italy safeguarded the structure of its budget, didn’t give up the contents and citizen’s wage, pension reform will launch at the time that was originally planned, while the number of people affected by both measures will not change. The solution reached with the EU is good for Italy, satisfactory for the EU”. Conte also assured about no-Italexit and said that calling into question Italy’s place within the EU is not and never will be a goal for his government and he urged the EC during budget talks that his government has to safeguard social stability in Italy.
Italy’s Salvini said, “The EU accord will not lead to any fall in investments (government capex) in 2019-21 periods and it’s now Rome’s turn to look at the EU budget, will not accept any cuts to fishing, agricultural spending”.
Italy’s Di Maio assured political stability in Italy and said he “doesn’t see clouds in the horizon for the ruling coalition; the government will press and there won’t be a reshuffle. The government in January will start constitutional reform with aim of cutting a number of MPs and costs”.
The Italian cabinet undersecretary and a top League official Giorgetti said: “Rome sought the budget deal with the EC when it realized it could avoid sanctions while keeping the budget’s two key measures. And the 2% budget deficit compromise was decent because the EC had wanted 1.6%”.
When Giorgetti was asked about the government promise to the EC to raise taxes in future years if needed, he was non-committal and said “everyone lives for today”. But Giorgetti also assured that even if League makes big gains at EU election, it will not ask for more ministers or an early election. Giorgetti also pointed out that the Italian FM Tria was “constantly acting as a brake” in government budget negotiations with the EC, while others accelerated.
Overall, it now seems that although there is some budget truce between the EC and Italy for 2019 budget deficit target projection, the EC will watch the actual implementation carefully and we could see more “war of words” and “games of chickens” for this Italian budget. Like Italy, the 2019 France budget will also be keenly watched.
Pivot: 18700 Support: 18500 18400 18335Resistance: 18775 18815 18965 Scenario 1: STRONG ABOVE 18700 AND SUSTAINING ABOVE 18775-18965, MIB-40 MAY FURTHER RALLY TO 19040/19085/19200/19265 IN THE NEAR TERM Scenario 2: WEAK BELOW 18650 AND SUSTAINING BELOW 18500-1835018335, MIB-40 MAY FURTHER FALL TO 18000/17865/17720/17575 IN THE NEAR TERM Comment: SHORT TERM RANGE: 18000/18335-19380/19565
On Thursday, EURUSD closed around 1.1456, jumped almost +0.69% and made a session low-high of 1.1378-1.1485 on broad weakness in the US dollar coupled with Italian budget truce optimism and hopes of a soft Brexit.
On Thursday, the UK’s FTSE-100 slumped -0.80% to close at 6711.93 and made a session low-high of 6646.45-6765.94. The British market was dragged by exporters/MNCs for higher GBP, ongoing Brexit uncertainty, energies (lower oil), airlines stocks (London airport shut down for drones fear), and mixed pharma/healthcare, while supported by water and electricity & gas utility companies.
GBPUSD soared +0.47% and closed around 1.2669 on broad weakness in the US dollar, mixed UK economic data, a dovish hold by BOE amid worsening Brexit uncertainty and hopes of a soft Brexit or no-Brexit at all.
WTI Oil
In commodities, crude oil (WTI-Feb19) tumbled -1.78% Thursday and made a 17-month low of 45.68, but closed around 46.36. Oil was dragged by ongoing hedge fund liquidation, risk-aversion due to plunge in stocks and the perception that higher borrowing costs due to hawkish Fed and global QT may affect global growth and demand for oil.
But oil was also supported by lower USD and a report that Saudi Arabia plans to curb its oil output by more than the December commitment as it will reduce its crude output by about 322 kbpd from October levels, up from the previous 250 kbpd announced earlier this month.
On Wednesday, oil jumped +2.08% and closed around 47.20 on lower USD, mixed EIA inventory report coupled with a comment from the Saudi oil minister he is "certain" that OPEC+ will extend its 2019 crude production cuts when they meet again in April’19.
On early Friday, oil is currently trading around 46.26, jumped by almost +0.85% on short covering and on reports of deeper OPEC+ output cut than previously expected as OPEC seeks to bring Iran, Venezuela, and Libya on board to cut.
As per the report, OPEC's secretary-general Barkindo said in a letter on Thursday that OPEC plans to release a table detailing output cut quotas for its members and allies such as Russia in an effort to shore up the price of oil. Barkindo urged to reach the proposed cut of 1.2 mbpd; the effective reduction for member countries was 3.02%. The ratio of -3.02% cut for each member is higher than the initially discussed 2.5% as OPEC seeks to accommodate Iran, Libya, and Venezuela, which were previously exempted from any requirement to cut.