The UK equity market closed on the back foot on Monday as oil prices continued to decline.
Oil prices took another tumble as HSBC cut its oil price forecast for the rest of the year to around $45 per barrel, compared to the $60 it had previously expected. The bank said the market was oversupplied by an estimated 2m barrels a day in 2015.
Adding to the pain, Saudi Aramco chief Khalid al-Fatih said Saudi Arabia could sustain low prices for “a long, long time,” Bloomberg reported.
Figures showing a 5.6% drop in Chinese diesel use in December and gasoline use at its lowest in two years were seen by some as adding to Monday´s decline in prices.
“As it is we’ve probably seen one of the worst ever starts to a trading year, driven primarily by concerns around plunging oil prices, disappointing earnings, and slowing global growth, particularly in China and emerging markets,” said Michael Hewson, chief market analyst at CMC Markets.
“With oil prices also slipping to 13-year lows the correlation between the two has been the primary driver for some weeks now, with quite a bit of evidence that oil prices were at peak bearishness, as forward predictions for oil prices got steadily revised lower, on a daily basis.”
Meanwhile, there were very few economic data releases apart from the CBI industrial trends survey, the Ifo’s German business confidence report and the Dallas Fed manufacturing activity index.
The index for total orders in January came in at -15 compared to analysts’ expectations of -10 and the previous month’s -7, according to CBI’s industrial trends survery. Nevertheless, the balance of manufacturers expecting to increase output over the next three months improved to a five-month high of +14% in January from -5% in December.
“Manufacturers have seen a flat start to 2016 but while we have seen real problems in some industries in the last few months, there are signs that orders and production are stabilising overall,” said Rain Newton-Smith, CBI director of economics.
The German Ifo survey for January came in weaker than expected. The business climate index fell to 107.3 from 108.6 the previous month and below the 108.4 reading expected by economists. The current assessment and expectations indexes also undershot estimates, at 112.5 and 102.4, respectively. Economists had been expecting readings of 112.8 and 104.1.
The Dallas Federal Reserve’s report revealed that general business activity and company outlook indexes came in at their lowest readings since April 2009. The Dallas Fed’s general business activity index in January fell 13 points to -34.6, and its company outlook index slipped to -19.5.
Looking ahead , the attention will be on the Federal Reserve’s interest rate announcement on Wednesday and the Bank of Japans’ policy decision on Friday.
Analysts expect the Fed will keep interest rates unchanged after last month’s first hike in more than a decade by 25 basis points to 0.50%.
“While the Fed is expected to maintain status quo, the accompanying statement is going to be the centre of attention, especially given the recent slide of oil prices below $30 and the renewed Chinese sell-off,” said Brenda Kelly, head analyst at London Capital Group.
“The global macroeconomic conditions may not be appropriate for the Fed to hike 3-4 times this year as scheduled.”
Bank of Japan Governor Haruhiko Kuroda raised hopes of further stimulus on Saturday at Davos after saying the central bank “won’t hesitate adjusting policy, including easing policy, if necessary to achieve our 2% price target”.
Rabobank said while Haruhiko’s remarks were dovish, the BoJ is in the habit of reiterating that the BoJ ”won’t hesitate”.
“This phrase was used by Kuroda last May, September and November although the BoJ has not made any significant adjustment to its QQE programme since October 2014,” analysts at the financial services group said in a note.
In company news, Kingfisher slumped as it said profits would take a £50m hit in the first year of its five-year transformation programme.
Bankers were also among the biggest fallers after Sky News on Saturday reported they are preparing to set aside billions of more pounds for provisions against the payment protection insurance mis-selling scandal. Insiders from Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland and Santander UK told the broadcaster that banks would reveal at least £5bn in fresh provisions alongside their full-year 2015 earnings.
Tesco also took a hit after Cantor Fitzgerald analyst Mike Dennis said he believed the supermarket may get slapped with a fine of up to £500m by the Serious Fraud Office over its £326m accounting black hole.
Going the other way, Unilever gained after the consumer goods company said it will not scale back its UK operations if Britain votes to leave the EU.
Ophir Energy jumped after signing a non-binding head of terms agreement with Schlumberger, which will receive a 40% interest in the company’s Fortuna project in Equatorial Guinea.
Imagination Technologies was a high riser after saying it is reviewing strategic options for its audio products division Pure.
The FTSE 250 was flip-flopping between the black and the red on Monday, with the second-tier market relatively flat by mid-afternoon, down just 9.12 points (0.06%) to 16,118.87.
IMI took the biggest hit after Credit Suisse downgraded the engineer from ‘neutral’ to ‘underperform’ and dropped its target price from 870p to 710p.
The investment bank said the decision was based on a number of factors. “The current share price discounting a ROIC of 16% versus our average forecast for 2015-17 of 12%, cash conversion in 2016-17 below both IMI’s through cycle average and the sector average, a demanding valuation for no earnings growth and also potential downside risk to group EPS from further deterioration in revenue and margins in Critical in 2016E.”
In the same report, the Swiss broker downgraded its view on shares of Spectris.
Sinking oil prices saw oil and gas producers and service providers drop again. That caused Tullow Oil, Weir Group and Petrofac to feature in the fallers list.
However it wasn’t all bad news for the sector, with Ophir Energy bucking the trend. Shares were up after the company announced it had signed a non-binding head of terms agreement with Schlumberger, which will receive a 40% interest in the company’s Fortuna project in Equatorial Guinea.
Under the definitive agreement, which is expected to be signed in the second quarter, Schlumberger will reimburse 50% of Ophir’s past costs in the form of a development carried interest. This is expected to cover Ophir’s share of capital expenditures up until first sales of liquefied natural gas.
The benchmark DJ Stoxx Europe 600 index was down 0.62%, while France’s CAC 40 retreated 0.58% and Germany’s DAX by another 0.29%.
Things were worse out on the periphery, with the Ibex 35 sporting losses of 1.78% and the FTSE Mibtel losing 2.03%.
A softer-than-expected reading on German business confidence also served to dampen market sentiment.
“Markets have started the week tentatively, with European equities following oil prices lower, giving up some of the gains seen late last week. The correlation between oil and equities remains a key driver for markets as investors expect lower oil prices to force sovereign wealth funds to divest rather than invest,” said Rebecca O’Keeffe, head of investment at Interactive Investor.
Markets rallied at the end of last week after European Central Bank chief Mario Draghi hinted that further stimulus was on the cards.
As a result, investors will be paying close attention to the Federal Reserve rate decision on Wednesday, as well as the Bank of Japan’s monetary policy statement on Friday.
Remarks from Saudi Aramco chairman Khalid al-Fatih that his country would maintain its investment plans and figures showing a 5.6% drop in Chinese diesel use in December were seen by some as the reason behind Monday´s decline in prices.
In corporate news, 3i drifted lower in London following upbeat research notes from Societe Generale and Barclays.
B&Q owner Kingfisher was in the red after announcing a five-year transformation plan aiming to deliver a £500m sustainable annual profit uplift by the end of the programme.
Stock in Siemens lost 1.48% following a media report the industrial group has agreed to buy privately-held US engineering software firm CD-adapco for close to $1bn in cash.
Lloyds Banking Group was under pressure after JPMorgan cut its price target on the stock.
BT Group was also under the cosh as MPs called on the company to spin off its broadbank network.
On the data front, investors were left digesting a weaker-than-expected reading on German business confidence for January.
German research institute Ifo’s business climate index fell to a seasonally-adjusted 107.3 from 108.6 the previous month and below the 108.4 reading expected by economists.
Meanwhile, the current assessment index printed at 112.5 compared with 112.8 in December and missing expectations for a reading of 112.8.
The expectations index slid to 102.4 from 104.6 the previous month, falling short of expectations for 104.1.
SpreadCo analyst David Morrison said: “It’s a disappointment, undershooting the consensus expectation by more than a full point and also the lowest reading since this time last year.
“However, coming hard on the heels of last week’s dovish ECB statement, it does lift hopes that the central bank will announce further stimulus at its next meeting in March.”
US stocks declined on Monday, dragged lower by energy issues as oil prices slid.
The Dow Jones Industrial Average closed down 1.3%, while the Nasdaq and the S&P 500 ended 1.6% weaker.
Oil prices tumbled following a rally at the end of last week, after Iraq’s oil ministry said the country had record output in December, while a senior official said it could raise production further this year.
This weighed on oil and gas shares, with Chesapeake Energy skidding nearly 16% and Devon Energy down just over 11%.
Meanwhile, investors were looking ahead to the Federal Reserve’s latest decision on interest rates on Wednesday. The central bank is widely expected to keep rates unchanged at 0.50% following a 25 basis point rise last month, which was the first hike in almost a decade.
The focus will be on the press statement released alongside the rate decision to see whether the Fed hints at the timing of the next rate increase .
“A 13-year low in the price of crude oil has been a dark cloud over markets but the silver lining could be that it forces the Fed to rein in its plans for four rate hikes this year,” said Jasper Lawler, market analyst at CMC Markets.
“Alongside falling oil prices, the dollar has risen 2% since the last Fed meeting. A rising dollar slows inflation by reducing the cost of imports and reduces growth by reducing exports. A major risk for the rebound in global markets that began in the middle of last week is that Fed looks past oil, the dollar and market turbulence and keeps a hawkish bias.”
In company news, McDonald’s Corp edged higher after reporting fourth quarter sales and profit that beat expectations.
Shares in Tyco International surged after confirmation that it will merge with rival Johnson Controls.
Twitter ended the session sharply lower after chief executive Jack Dorsey confirmed that four high-profile executives will leave the social media giant, with two other executives picking up extra responsibilities.
Caterpillar slumped after Goldman Sachs downgraded the stock to ‘sell’ from ‘neutral’.
Oil futures headed lower on Monday, after failing to sustain a jump to $33 per barrel in Asian trading.
In the absence of any notable economic data, Brent fell back down by 3.70% or $1.19 to $30.99 per barrel, while WTI fell 4.47% or $1.44 to $30.75 per barrel at 1728 GMT, over yet another volatile session following Friday’s gains stateside and an early uptick over start to this week’s market proceedings in Singapore.
Simon Smith, chief economist at FXPro, said, “Many are rushing to adjust upwards their forecasts for the price of oil especially since the commodity bear market has been ongoing for a year and a half now, in some cases longer if you consider some of the softs.”
“Despite this strong bounce we are still down around 15% on the year for crude prices so it’s too early to say the worst is over for the commodity complex.”
Meanwhile, analysts at HSBC cut their forecasts for the average annual price of Brent in 2016 to $45 (from $60), to $60 (from $70) for 2017 and to $75 ($from $80) for 2018.
Elsewhere, headline base metal futures headed lower on the London Metal Exchange. At 1635 GMT, three-month delivery contracts of copper (down 1.1%), lead (down 1.4%), nickel (down 1.7%), tin (down 0.8%) and zinc (down 0.7%) were firmly in negative territory.
Meanwhile, precious metals climbed back above last Wednesday’s highs on renewed safe haven demand. On the COMEX, the front-month gold futures contract posted an uptick of 1.07% or $11.70 to $1,108.00 an ounce, while spot gold was 0.82% or $8.97 higher at $1,106.92 an ounce.
COMEX silver rose 1.37% or 19 cents to $14.25 an ounce, while spot platinum rose 3.47% or $28.90 to $861.40 an ounce.
Liz Grant, senior account executive at Sucden Financial, said, “Following the rollercoaster ride on the markets last week, the beginning of the new week was somewhat subdued. LME trading was very quiet with prices trading close to unchanged for much of the day and in thin conditions.
“Gold continued to benefit from investor “safe haven” demand, moving back above $1,100 to $1,108 with resistance area above at 1110/15.”
Finally, agricultural commodity futures were largely in negative territory. CBOT corn (down 0.14%), ICE cocoa (down 2.01%), cotton (down 1.25%) and CME live cattle (down 0.28%) headed lower in early trading calls stateside.
Commodity linked currencies took another tumble on Monday, while the euro and pound recovered versus the dollar over late afternoon trading in Europe.
At 1606 GMT, the euro was up 0.36% against the greenback exchanging at $1.0835 while the pound rose 0.07% exchanging at $1.4271.
Kit Juckes, head of forex at Societe Generale, said, “We’d like to stay short on the pound, even though we may see a bit more of a bounce before we’re done. Brexit fears aren’t going to go away. The December retail sales told us nothing other than the UK seasonal data distortions are monstrous but the Bank of England is on hold for a long time and that makes any bounce temporary.”
Major commodity linked currencies continued to grab attention as oil rebounded as high as $33 per barrel in Asia before falling back to the $31 mark, still close to lows last seen in December 2003.
Earlier in the session, Russia’s statistics office said the country’s economic growth fell 3.7% on an annualised basis in 2015 down from a growth figure of 0.6% the year before, according to preliminary data.
Tax receipts of oil and gas, which account for over 50% of the Russian Treasury’s net takings, were severely dented by a decline in the oil price with Brent futures ending 2015 over 36% lower. Additionally, a mixed bag of international sanctions on Russia in wake of the Ukraine crisis and lower consumer confidence resulted in retail sales and capital investment declines of 10% and 8.4% respectively; the worst on record since 2009.
Russia’s currency – the rouble – fell to record lows against the dollar last week, exchanging at RUR85 to a dollar before recovering. At the close of trading in Moscow, a dollar changed hands at RUR78.87 down 1.1%.
Elsewhere, the greenback rose 0.97% against the Canadian dollar exchanging at CAD$1.4256. Concurrently, the Australian dollar fell 0.50% against the greenback exchanging at US$0.6967 and the New Zealand dollar fell 0.31% exchanging at US$0.6473.
In Latin America, the dollar rose against major regional crosses, including the Colombian (up 2.04%), Mexican (up 0.57%) and Chilean (up 0.69%) pesos.Risk Warning:
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