Commodity companies crumble as China is quiet

The London market gave back some of the gains it made on the back of last week’s ECB extra easing and it was the commodity sector that suffered the most.

Data trader looking at screens
Source: Bloomberg

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.  

FTSE risers and fallers (as of 4.15pm)

Company % change Index points
British American Tobacco +0.57 +1.7
Unilever +1.09 +1.6
GlaxoSmithKline +0.35 +0.94
WPP +1.02 +0.8
National Grid +0.53 +0.75


Company % change Index points
BHP Billiton -6.6 -4.44
Rio Tinto -4 -3.83
Glencore -5.34 -3.59
Legal & General Group -6.24 -3.52
Anglo American -10.74 -2.99

The day ahead

Economic data:

9.30am – UK unemployment data: claimant count expected to drop by 12,700 for February, while the unemployment falls to 5% from 5.1% for January, and average hourly earnings rise 1.8% for the same month.

12.30pm – UK budget: chancellor George Osborne will unveil fresh budget measures for the UK economy. 

12.30pm – US CPI (February): US price growth expected to be 1.3%, down from 1.4%, while core prices rise 2.1%, down from 2.2%.

3.30pm – EIA crude inventories: forecast to rise by 1.5 million barrels, lower than previous week’s 3.8 million increase. Gasoline stockpiles forecast to fall by 1.9 million barrels, from the notable from of over 4 million a week earlier.

6pm – Fed meeting: no change to policy expected, with rates likely to remain at current levels. However, commentary may well indicate whether the FOMC is still looking to carry on with gradual tightening.

11.50pm – Japan trade balance (February): expected to narrow to ¥245 billion from ¥645 billion.

Corporate data:

UK:  Hikma Pharmaceuticals, Cape, Paysafe Group, Skyepharma, Accesso Technology Group, Smiths Group

US: FedEx Corp

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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