Nervy markets sell off as volatility rises

Volatility has increased as a hawkish Bank of England pushes indices lower.

City of London
Source: Bloomberg

Markets confidence dented

Coming off the back of strong gains across many of the major indices, today saw expectations of new highs and regained confidence dashed in style as European indices and US futures suffered substantial losses. Following a week of losses, today's weakness has sent shockwaves throughout the market, with a more protracted selloff looking increasingly likely.

Today's monetary policy decision from the BoE followed the norm with the somewhat unexpected, as a unanimous vote against raising rates was counteracted by the view that recent moves in the value of sterling will raise inflation sooner than expected. This pushes rate hike expectations forward and shows that central bankers are possibly willing to somewhat overlook the influence the oil price is having on inflation levels.

Tesco's earnings release hammered home the drab tone within the markets today, announcing a £6.4 billion loss; the biggest in the company's 96-year history. This may not be as bad as first seen, with that loss being attributed to loss of profits rather than a cash loss. Nevertheless, with the UK's biggest supermarket failing to cope with increased price competition from low-cost producers like Lidl and Co-op, CEO Dave Lewis has a big job on his hands to steer this tanker back on course as soon as possible.

Elsewhere, Rolls-Royce has enjoyed the biggest gains in the FTSE 100 after former ARM Holdings CEO Warren East took over at the aircraft engine manufacturer. With a year of falling  profits, order cancellations and job cuts across the board, the hope is that Mr East will replicate his performance at ARM, which saw the price rise 283% throughout his 12-year tenure.

Solid macro data unable to spur US markets

US indices followed their European counterparts lower today, as consolidation within the likes of the Dow Jones reigned over any real sense of direction. US existing home sales data finally saw something to shout about, with a market-beating reading of 5.19 million sales. This announcement brings us back to more normal levels ahead of the spring selling season where the recent rise in employment, coupled with ultra-low mortgage rates, is likely to spark significant growth in house sales.

Elsewhere, US crude oil inventories jumped up to 5.3 million barrels following the lowest rise in inventories of 2015 last week. While this rate of growth in inventories is relatively 'normal', we have now seen  fourteen weeks of consecutive build-up of stockpiles, showing that despite a falling rig count, US oil is still well and truly flowing.

Despite a buoyant rise in the share price of Rolls-Royce, its trade partner Boeing wasn’t so lucky, as it was the biggest loser in the Dow today. Despite seeing EPS rise more than expected, investors instead focused on the 92% fall in operating cash flow and continued problems arising from the 787 Dreamliner. Starting with an initial introduction some three years late, the Dreamliner has been hit by countless snags which have sucked cash and resources out of the business.

McDonald's saw a spike following the US open, as markets looked past somewhat drab earnings to focus on its announcement of a new turnaround, due in early May. Following food scandals in its Chinese and Japanese divisions, McDonald’s has its work cut out in an increasingly health conscious and environmentally aware consumer.

Gold slips below support

WTI has seen a moderate spike following the crude oil inventories number, with upside capped at $57 for now. The strength seen over recent weeks has been attributed in part to easing production pressures as the US rig count continues to fall. However, coming off the back of such a strong rise, it seems likely that traders will begin to take some of those profits off the table and prices could ease once more.

Gold has sunk back to a key support level at $1180 today, representing the lower end of a range that has been in play for a month now. Long term, we are looking bearish, yet with such recent volatility, consistency in the movement of gold has been hard to come by.

Cable heads higher

Today's BoE announcement brought the bulls back to the table for sterling, with GBP/USD pushing higher in the early session. The unwillingness of EUR/USD to follow suit indicates this is a purely fundamentally driven move and despite a possible resurgence in the near term, weakness is expected to prevail to bring back the status quo once more.

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