Equities bounce back

By David Morrison  |  26/11/2018 15:53

European and US equities were sharply higher early Monday. Investors were cheered by an apparent thaw in EU-Italian relations, a recovery in oil and hopes of a US/China trade breakthrough

US and European stock index futures were sharply higher in early trade on Monday, making up for last week’s heavy losses. Investors had been caught off-guard by moves over the holiday-shortened Thanksgiving week where US indices posted their biggest declines in seven years. But technically there was room for a bounce, even if the major US indices weren’t particularly oversold as far as such indicators as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) were concerned. All that was needed to catalyse some short-covering was a bit of positive news. And that's exactly what we got.

Not all Brexit

But it wasn’t just the weekend ‘wave-through’ of Theresa May’s Brexit proposal by the European Union, even though the news helped to boost UK banks. Investors understand the UK Prime Minister faces a much bigger hurdle when her Chequers-type plan is put before Parliament in a couple of weeks’ time. Instead, European stocks soared on the news that there’s an apparent thawing in the relationship between the European Commission and the Italian government over the latter’s deficit-busting spending plans.

Italy backing down?

On Sunday Italy’s Deputy Prime Minister Matteo Salvini suggested there could be a rejigging of the draft budget. Then on Monday he told Italian media that his government could be "open" to a lower deficit spend. He went on to say that his aim was to prepare a budget that would make the country grow, which could be “2.2% or 2.6%" of GDP (compared with the current problem number of 2.4%). Italy’s other Deputy Prime Minister Luigi Di Maio agreed that the deficit target could be reduced as part of the final budget plan. However, the EU is still calling for the Italian government to cut their deficit target below 0.8% and that seems a long way below the target set by the coalition. Such a climbdown by Italy’s leaders would not go down well with voters. Support for Salvini’s Northern League party has increased every time he has stood up to the European Union. Nevertheless, the news saw Italian banking stocks soar. At the same time the spread of Italian 10-year government bonds over German dropped back below 300 basis points (bps). Last week the spread was trading near 325 bps.

Crude recovers – a touch

Crude oil was a touch firmer first thing. But despite being extremely oversold, the best that can be said about the move so far is that at least oil has stopped going down in price. Nevertheless, traders are now speculating that the OPEC meeting on 6th December could result in another agreement by OPEC and some non-OPEC producers to cut output. This could happen, but it follows news over the weekend that Saudi Arabian crude production hit an all-time high in November, coming in around 11.2 million barrels per day (bpd) – up by 500,000 bpd from the previous month. Russian and US output has also hit fresh record highs over the last few months. 

Fed speakers and data releases

This is a big week for Fed speakers. This is important given how many investors now hope that the US central bank may indicate that it is prepared to slow down the rate of future rate hikes. However, perhaps they shouldn’t get too carried away as every market bounce reinforces the view that there’s nothing fundamentally wrong out there. Fed Chairman Jerome Powell has previously indicated that he’s reluctant to alter monetary policy just to counter a sell-off in equities.
 
Calendar highlights

Tuesday sees the release of the US Conference Board Consumer Confidence index and speeches from FOMC member Raphael Bostic and Federal Reserve Vice-Chairman Richard Clarida. On Wednesday the Bank of England releases its Financial Stability Report and Bank Stress Test results. We also have US Preliminary third quarter GDP, Crude Oil Inventories and a speech from Fed Chairman Jerome Powell. Thursday brings third quarter GDP updates from Germany and France and the ECB’s Financial Stability Review. From the US we have Core PCE, the Fed’s preferred inflation measure, Personal Spending, Personal Income and minutes from the last FOMC meeting earlier this month. On Friday there’s Chinese Manufacturing and Non-Manufacturing PMIs, Euro zone Flash CPI, Canadian GDP, Chicago PMI and a speech from FOMC member John Williams.

US/Chinese trade talks

But the highlight of this week will be the G20 meeting in Argentina on Friday and Saturday. This has nothing to do with what will come out of the G20 meeting itself, as usually nothing does. However, this is expected to be the venue for a side meeting between Presidents Xi Jinping and Donald Trump. Again, hopes are high amongst investors that the two leaders will manage to reach a compromise over their trade differences ahead of the next scheduled escalation in tariff hikes in the New Year.
 
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