Market commentary: Markets rally, pound drops on UK Deal

Fresh off the news block this morning, HSBC Holdings PLC, which recently announced it will retain its headquarters in the UK, have announced in a conference call with analysts this morning that the restructuring of the business has been completed and that the bank is now strong and well capitalised.

The company’s shares have plummeted 5% following the announcement of results this morning. Investors were caught off guard by an unexpected fourth-quarter loss as income from lending fell, loan-impairment charges increased and it booked fair value losses on its debt.

Looking at the broader market, the FTSE 100 is lagging its European counterparts in a positive opening for all bourses. The British index is up 1.2% while the French CAC 40, German DAX and remainder of European equity markets are all at least 1.5% higher.

The surge is attributed to news of a deal reached between British Prime-minister David Cameron and the European Union, as well as better than expected economic data from the Euro area.

The British pound is under pressure this morning as most analysts believe a larger volatility in the currency is expected over the coming weeks until a decision on the UK’s membership in the EU is reached.

Despite the agreement reached earlier over the weekend, influential conservative London mayor Boris Johnson publicly announced his stance against membership, dealing a blow to David Cameron’s hopes of retaining the UK in the union. As at the time of writing, the GBP is trading lower by 1.71% against the USD, down to USD/GBP 1.416 and to EUR/GBP 1.2774, down 1.30%. This is the largest slide in 11 months and the Brexit discussion is expected to feature prominently over the next couple of months.

WTI Crude has regained the USD 30 a barrel level, rising 2.83% to USD 30.48 on Friday. The correlation between the performance of the equity price and the price of oil remains strong. US futures are currently pointing toward a stronger open, with the Dow Jones, S&P 500 and the NASDAQ up around 1%.

Moving on to credit, sovereign debt continues to rally, with most European sovereign yields trading tighter, except the UK. 10-year German bond yields are trading as low as 0.194%, tighter by a further 0.6 bps, while peripheral countries like Italy and Spain are trading at 1.529% and 1.688% respectively, making them one of the best performing markets since the beginning of the year. The asset class is expected to continue to be boosted by speculation of further measures to be announced by the ECB over the coming months in a bid to boost the misfiring economic region.

Looking at the investment grade index, iTraxx Europe is tighter by 2.84 bps to 110.60 in line with the performance of sovereigns. Leading sectors are the Materials, Consumer Discretionary and Financials. On to high yield, the iTraxx Crossover is indicating a rally led by the Materials sector and followed by Utilities. The index is 7.3 bps tighter to 436.14, helped by a strong rally in Portugal telecom and Arcelor Mittal. The index is still 38.56% higher YTD, indicating there is still a long way to go to recover to levels seen at the beginning of the year.

This article was issued by Simon Psaila, Treasury Officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are 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 Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.