Market commentary: European markets reverse strong start

Following an initial bounce as a result of the follow through from the positive session in Asian markets, European shares took a turn for the worse on the back of poor economic data. German business confidence fell for a second month in January in a sign that companies in Europe’s largest economy are increasingly worried about slowing global growth.

German manufacturing is increasingly at risk from a slowdown in global trade, with the weakest Chinese economic growth in more than two decades throwing markets into turmoil and the International Monetary Fund downgrading its outlook for 2016.

Previously, Asian shares advanced amid speculation over whether central banks will come to the rescue of turbulent financial markets. The gains in Asia are lifting the MSCI All-Country World Index for a third day, after a 2 percent jump in U.S. shares on Friday contributed to the gauge’s best day since June 2012.

U.S. crude slid below $32 a barrel as the world’s biggest crude exporter said it’s keeping up energy investments, while gold rose 0.5 percent. The won strengthened a second day as the Japanese yen increased.

Late Friday, news emerged that S&P upgraded Greece. In a scheduled revision, S&P upgraded Greece’s sovereign rating from CCC+ Stable Outlook to B- Stable Outlook as the county’s government is “broadly” complying with the terms of the EUR86bn bailout programme signed last summer.

In stock specific news over the weekend, an article in the Telegraph said that Tesco is preparing to tackle its growing debt pile after the sale of the South Korean business last year. The company is planning to take its biggest step in rebuilding its balance sheet by repaying £1.4bn of its borrowings over the coming months.

Italian banks have been at the forefront of news lately. Over the weekend news that no deal was reached over the future of Monte dei Paschi di Siena (Monte) with attention now turned to a meeting tomorrow between the Italian finance ministers & the EU competition commissioner.

Chatter in the press over the weekend was that Banco Santander is interested in Monte (denied by the former) & that the Italian government has approached the head of Banco Popolare di Milano to ask him to consider a tie-up with the Unione Banche Italiane, with a view to eventually merging with Monte.

On Friday, S&P updated its price assumptions for metals for 2016-18, lowering prices for aluminium, copper, nickel, zinc and iron ore to around spot levels. This means anything between a 10-25% cut in S&P’s price expectations for next two years. While it expects prices to recover from current spot levels in the medium-to-long term, it said they will remain very volatile as the impact of the China slowdown plays out.

S&P will now review the mining issuers using these new assumptions over the coming month or so, indicating this could result in some rating actions. When it last reviewed its price assumptions in August 2015, S&P took nine rating actions including two downgrades.

This article was issued by Simon Psaila, Treasury Officer 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.