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Traders in London are in defensive mode, and the commodity sector is dragging the UK equity benchmark into the red. BHP Billiton, Rio Tinto and Glencore have fallen out of favour with investors as the sell-off in the underlying metal’s and energies markets has pulled the stocks lower. Natural resource stocks are very sensitive to goings on in China, and Beijing is still speculated to reveal a new stimulus package but nothing has been confirmed yet.
Commodity companies easily outperformed the FTSE 100 in the past four weeks so they can be forgiven for weighing on it today. There is little in the way of scheduled economic announcements from China this week and while there is no sign of a stimulus package from the country, further losses for mineral extractors are likely.
British American Tobacco is in high demand today as traders seek out defensive stocks despite that it is tipped cigarettes will be levied with an additional 16p per pack tax in tomorrow’s budget. Traders will be looking out for changes to pensions in George Osborne’s announcement, and the insurance sector is very mixed today, which underlines the uncertainty surrounding the sector.
In continental Europe, it is the banks who are suffering the most as Banco Santander, Banco Bilbao Vizcaya Argentaria and Deutsche Bank are the biggest fallers within the EU 50. The banks are still above their pre-European Central Bank (ECB) meeting levels and the pullback may entice buyers as Mario Draghi’s latest round of stimulus encourages the finance house’s to increase their lending.
The US equity market is also offside but it is faring better than its European counterparts. The Dow Jones and S&P 500 have lost ground today but both are still above their pre-ECB meeting levels. Both indices are still in their upward trends that have been in place for the past four weeks.
Investors will be focused on the Federal Reserve’s meeting tomorrow. There is a 4% chance of an interest rate increase tomorrow but, a 79.3% chance of a rate hike in December and the commentary will be crucial. Traders are wondering if the Fed is still on gradual monetary tightening path and suggestions that it is will be welcomed by the bulls as an optimistic outlook would justify a continuation of this rally.
Higher oil prices and less fear surrounding China may make the Fed more hawkish but some nervousness still exists. Currently, 63% and 90% of Wall Street components are above their 10-day and 20-day simple moving averages (SMA) respectively, while it is 60% and 83% for the for the constituents of the S&P 500. Investors are still more bullish on the bigger names and this suggests risk appetite isn’t excessive.