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.
Shell's purchase drives FTSE higher
Royal Dutch Shell's $70 billion decision to buy fellow energy firm BG Group pushed the UK's flagship index significantly higher today, driven no doubt by the idea that the heavily energy-directed index could see yet more M&A activity off the back of the recent fall in oil prices. However, this news appears to have hidden the largely mixed sentiment seen throughout the European markets, caused by a day of relatively low volatility in the likes of the DAX.
Tomorrow brings about a crucial deadline for Greece, as the beleaguered nation will be required to repay €458 billion to its IMF creditors. Subsequently, the decision by Greek prime minister Alexis Tsipras to discuss credit options with Vladimir Putin today signals warning signs for many. Even if the Greeks were to pay the debt as expected, the timing of this meeting shows they want to be seen to not be playing by the book. After all, that is pretty much the core mandate for its election earlier this year.
Oil majors were undoubtedly the talk of the town today, with Shell's purchase of BG drawing comparisons within rival firms hoping to either buy or be bought. Rio Tinto, BP and BHP Billiton are just a few of the names that have profited from the good feeling brought about to the sector from BG's purchase. However, as is often the case, the loser from all of this has been that of Shell, falling over 3% in today's session. The presumption is that mergers of this size often do not neccesarily benefit the investor. With size, comes difficulty to maintain an efficient and streamlined operation, which brings about comparisons with many of the failed mergers of times gone by that were driven more by the desire to create a bigger firm rather than a more profitable or efficient one. That said, with oil prices so depleted this is unlikely to be the last of these value-based oil and gas mergers.
Today's news that Aldi has overtaken Waitrose as the UK's sixth-largest grocer follows a clear trend towards discount chains that are increasingly taking market share off the majors. The big four (Tesco, Asda, Sainsbury's and Morrisons) account for the lowest share of the market for over a decade and with consumers seeking value for money across many of the main industries, the trend is likely to continue towards value rather than luxury.
FOMC minutes due today
Friday's jobs report continues to ring in the ears of the markets, with analysts split over whether we are now set to see a takeoff closer to September rather than the June hike many had been angling for. Whether this month's numbers were simply a one-off due to weather, or if there is an underlying story behind this is the question that has split many traders and this should bring both volatility and indecision. However, just as the dust has settled, the Federal Reserve has returned to the spotlight, with the FOMC minutes due to be released later today.
The tone coming out of the Fed points towards rates remaining lower for longer, with a slower takeoff now expected. The key things to look out for will thus now be geared towards when that lift-off will happen and its take on US economic and export strength in the face of a strong dollar. The Fed dots projected lower growth, and thus a more dovish outlook is likely. Plus, with such a poor jobs report having occured since this meeting, the markets are likely to discount much of the more hawkish comments.
The strength seen in the US markets today point towards expectations that there will be a more dovish outlook, which coupled with the weak jobs report will likely push the indices higher yet. Until then, volatility has come in the form of an unexpected jump in US oil inventories, which saw a spike to 10.9 million barrels, accounting for the largest inventories number in 14 years. This increased backlog spells further danger for the likes of oil prices and thus the dollar and indices have sold off in response.
Elsewhere, Alcoa kicks off US earnings season tonight, with many seeing the aluminium producer as an important bellweather for the US economy. Given dollar strength, coupled with both weak prices and demand for most commodities over the past year, it would come as no surprise to see a disappointing announcement which would no doubt impact expectations across many other reporting firms.
Gold eyes $1200
Brent has been showing clear signs of resurgence over the past three weeks, with the inability to break to a new low pointing to the possibility that we may have bottomed out already. Fears regarding a major increase in supply resulting from the proposed US-Iran deal have been quickly dispelled as 'wide of the mark' given the fact that the deal is far from being implemented and even then, the underinvestment in Iranian oil means it would take up to a year for any serious volume to be hitting the markets. However, with today's US oil invetories announcement of a 14-year high comes the obligatory selloff, with WTI being hit hardest.
It goes to show that while US oil investment is slowing, there is still a great deal of output coming from that side of the Atlantic.
Gold has been heading south in today's trading following substantial strength in response to what seems like a near-term bottom around $1142 in March. Given the more bullish signs in the market, this strength is likely to be short-term and $1200 is seen as a strong level of support which could bring on another bout of buying.
Further losses on the horizon
Recent resurgence in the likes of EUR/USD and GBP/USD appear to be fading today, with major resistance being closely respected. The impact of Friday's jobs report should have been one of dollar weakness given a more accomodative Fed stance. However, with prices already at technically crucial resistance levels, the markets instead decided to sell into any upside seen on Friday.
This gives a clear idea of the degree of bearish sentiment in the the markets and points towards further losses in the near future.