Market Commentary: A better day for European, US and Asian markets

Markets in Europe and the US rallied on Thursday, and Asian bourses followed suit on renewed hopes of additional global stimulus from the like of Japan, China and the EU. The price for crude oil fell below $27 on renewed oversupply concerns, before recovering to over $30 during yesterday’s session. In Asia major bourses have recouped most of this week’s losses thanks to an impressive rally this morning. A positive open in Europe suggests that markets are on course to erase this week’s losses.

In the UK, Pearson plc stock gained more than 18% despite issuing a profit warning. Investors took solace from an updated outlook by the company and commitments to shed 10% of the workforce in order to reduce costs. Miners Glencore and BHP Billiton also registered double digit gains.

Deutsche Bank AG fell as much as 6% after it said it expected to make a full-year net loss for the first time since 2008. The loss came on additional charges tied to legal and restructuring costs and unfavourable market conditions. The stock pared its losses later on in the session but still closed at almost 4% in the red.

Barclays is cutting about 1,000 jobs in investment banking worldwide and closing its cash equities business in Asia. The cuts are among the most sweeping by an investment bank in recent years and follow similar moves by other European lenders seeking to cut costs in a tough global environment for banks. The cuts would come in addition to the 19,000 jobs that the Bank has already announced it will remove over the next three years.

Italy and the EU

The Italian FTSE MIB index was up over 4% on the back of strong rallies in the banking sector. Italy’s third-largest and most historically troubled bank, Monte dei Paschi di Siena (MPS) was up 23 cents to finish at €0.74. That’s a 46% increase, but don’t let that number fool you - the Italian banking index is down 18% this year, and MPS is struggling. Reports that depositors are pulling their funds are hurting the bank which is already dealing with an extremely weak balance sheet due to an excessively high proportion of non-performing loans. MPS is desperately in need of a lifeline, be it from government or from a private sector buyer, or it could be ciao ciao.

The possible failure of a bank should not be taken lightly. There are, of course, moral hazard considerations in saving or bailing out banks, but a solution must be found to avoid a Lehman-style fallout. While probably not of the same magnitude, a banking crisis in Italy would send strong shockwaves across the EU and the Eurozone. The bloc is already facing pressures from a possible UK exit and unprecedented migrant inflows. And with a liability such as Greece in the background policy makers in the EU may be facing another round of sleepless nights.

China’s Communication Issues

Fang Xinghai, a top adviser in China, has conceded that poor communication contributed to global market anxiety over China’s falling currency, and tried to reassure investors that Beijing is not pursuing competitive devaluation. Speaking at the World Economic Forum in Davos, Mr Fang insisted China had “no basis” for seeking a weaker currency. This would usually be a hard sell for China, were if not for the fact that China is indeed drawing down its foreign exchange reserves to combat such weakness. The statement also falls in line with China’s drive to move away from export-led growth to a more consumption-based approach.

ECB – More Easing in March?

Thursday saw the European Central Bank (ECB) meeting for the first time in 2016. While the ECB left key interest rates on hold, President Mario Draghi dropped hints that the bank is considering further action in its next meeting in March. Quoting concerns about inflation dynamics, Draghi said that current inflation projections did not capture the extent of the fall in energy prices. Whilst recognizing that the positive effect of the current drop should soon start to filter to companies and households, crude oil was 40% higher when these projections were published.

So we are now faced with the prospect of more monetary policy expansion at a time when central banks are running out of options. Central bankers are of course reluctant to say this, but there is a strong argument against more loosening. Interest rates are at or below zero, and most central banks are buying large amounts of assets under the guise of quantitative easing. This has helped lift asset prices overall but has failed to accelerate credit and inflation, the latter being ECB’s main target.

Indeed central banks repeatedly underlined the need for their respective national governments to step up to the plate and implement the necessary reforms to put economies on a stronger footing, and be less dependent on central bank money for growth. In his speeches, the ECB President has often criticized the “sluggish pace of implementation of structural reforms”. Flooding the world with cash was warranted to avoid a global financial meltdown and a possible depression in the wake of the events of 2008, but this strategy seems less desirable now.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.