Traders move into “risk off” mode

Equity markets pause to catch their breath as looming European Central Bank QE announcements will set the tone for weeks to come.

Europe flag
Source: Bloomberg

Having spent the majority of the last two weeks climbing higher, equity indices look to have lost confidence just as they are about to set new highs for the year.

Sentiment has changed to a “risk off” mentality, as traders look to reduce their market exposure ahead of the ECB’s latest press conference due on Thursday.

Institutional consensus has clearly shown that they are almost fully factoring in an increase to the stimulus that the ECB will inject into the region. With over 95% of institutional analysts expecting the stimulus, over 70% of those expect it to come in the form of increased quantitative spending.

From the lows of mid-February, the FTSE 100 has added over 8.5%, and considering the back-drop of uninspiring economic data releases, collapsing sterling and increased uncertainty surrounding the UK’s involvement in the EU, the inability to maintain this trajectory is maybe no real surprise.

Investors still have much to ponder when managing their exposure to the FTSE, as income stream still remains important to investors, and the fact that the index yield has climbed up to 4.58% bares further analysis.

With the outlook for interest rate rises being measured in months not weeks, this at face value offers an attractive return, but when you consider many in the mining sector no longer willing to pay out a dividend, this could be a case of too good to be true.

Commodities continue to ensure traders have more than their fair share of volatility to pick from. Gold’s determination to keep climbing has seen many re-assess their pessimism to the precious metal, as it has now seen a 21.2% bounce from its January lows and still looks like it has the ability to add to this having now traded above $1270.

Iron ore has also earned its place in trader’s affections, having jumped by an equally impressive amount in 2016. Expectations that China will once again embark upon an infrastructure spending spree have boosted, following recent comments from policy makers in the Asian power house.

Oil prices still remain determined to ignore the fundamentals as Brent has today touched $40 a barrel, taking the price back to levels last seen in early December 2015.

FX markets have for weeks been factoring in the weakness of an increased QE scheme by the ECB, so the crystallisation of this on Thursday from speculation into fact might not create too much of a ripple.

The shock in GBP/USD that greeted the news that the London Mayor Boris Johnson wanted to see the UK exit the EU has subsided. The daily barrage of corporate quotes both for and against a Brexit have so far only added to the confusion.

With over eight weeks still to go before the country decides, the speculation and debate will only intensify, and GBP/USD will need to be fleet of foot to ensure they are not caught out, as volatility will only become more difficult to manage the closer we get to 23 June.

 FTSE risers and fallers

Company % change Index points
Rio Tinto Ltd +5.68 +5.79
Glencore +4.28 +3.12
Old Mutual +7.29 +2.49
Anglo American +4.32 +1.31
WPP +0.98 +0.76

 

Company % change Index points
Vodafone -1.76 -4.04
British American Tobacco -1.00 -2.94
Reckitt Benckiser -1.8 -2.93
Prudential -2.04 -2.74
BP -0.94 -2.45


The day ahead

Economic data:
2am – China trade balance (February): the forecast is for the trade surplus to drop to $45 billion from $63.30

5am – Japan consumer confidence (February): consumer confidence is expected to increase to 42.7 from 42.5

7am – German industrial production (January): the consensus is for a 0.2% decline, and that compares with a 1.2% drop in December.

10am – eurozone GDP (Q4, second estimate): QoQ expected 0.3%, prior 0.3%. YoY expected 1.5%, prior 1.6%

11.30pm – Australia Westpac confidence index (March): it is tipped to fall from 101.3 to 100.8

Central Bank Speeches:

9.15am – BoE governor Mark Carney and deputy governor Jon Cunliffe are speaking.

Corporate reporting:

UK: Foxtons, Paddy Power

US: Merck Group

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