Europe's mood is 'risk-off'

Today's mood was stuck rigidly in 'risk-off' due to increased tensions with Syria, continued uncertainty regarding US Federal Reserve tapering and trouble in the eurozone.

European markets

Jitters in equity markets were felt from the open, as the likelihood of a US-led military response to the tensions in Syria heightened. The resulting lack of clarity and ongoing uncertainty with respect to Fed tapering has prompted investor profit-taking with the banks, with resource stocks bearing much of the brunt. On the flipside, the precious metals market is firmly in the black, with Fresnillo adding 7.97% on sturdier gold and silver prices. Randgold Resources was also in favour, adding 5.61%.

Political uncertainty in Italy is adding to trouble in the eurozone; the mere notion that financial reforms will not go ahead has negatively impacted Italian prices and weighed on the Italian bourse. Elsewhere, the German IFO business climate index beat expectations, rising to 107.5 from last month’s 106.2, but the data did little to pacify investor caution. The prospect of yet another bailout for Greece was an additional fly in the ointment, and Greek finance minister Yannis Stournaras has stated that an additional smaller amount may be required in 2014.

US markets

US equity indices also opened significantly lower. News that house prices in June rose at a slower pace month-on-month than expected was something of a setback for opening prices, but a lift of 12.1% year-on-year in June was higher than the 12% forecast.

In stark contrast to yesterday’s disappointing durable goods orders, which served to indicate that the US manufacturing sector may not be as healthy as initially presumed, the Richmond manufacturing index obliterated the expectations of a -7 print by coming in at +14. Consumer confidence also increased marginally in August with the index standing at 81.5, up from 81.0 in July. 

The present mix of data emanating from the US does very little to help us anticipate what can be expected from the Fed in the coming months. With markets currently off their highs from this year, ruminations of the US debt ceiling issues coupled with the possibility of war in the Middle East will be likely to keep investors on the sidelines in the near term.

Commodities

The commodity suite was the area to watch today, with Brent crude oil breaking higher above $113/bbl and establishing a six-month high. Unrest in the Middle East and the potential for increased volatility tends to put the risk on the upside for oil, and any prolonged disruptions to pipeline supply could send the oil price back to this year’s highs of $119.

Gold has also been a beneficiary of safe-haven capital flow, rising to a three-month high of $1420/oz. As long as uncertainty prevails with respect to both Fed tapering and possible military intervention in Syria, there is potential for additional gains. The 200-day moving average lies just above the $1500 metric, and the market’s predilection to revert to its average could make this area an upside target in the shorter term.

FX

The Japanese yen and the Swiss franc were the out-performers today as investors sought safe havens. Renewed strength in the yen negates much of the aggressive easing made by the Bank of Japan this year.

The resource-dependant Australian dollar has continued its decline, and was today hampered further by the flow to safer currencies.

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