The wave of fear that rocked markets around the world continued to impact Asia Pacific trading overnight but has faded this morning. European indices are on the rebound with the major indices like the DAX, FTSE, IBEX and FTSEMIB all rising in the 1.0-2.5% range. US index futures are also pointing higher again with Dow and S&P futures gaining 0.75-1.00% while NASDAQ 100 futures have confirmed 3,900 support taking a run at the 4,000 level.
Today’s big turnaround is being driven by an easing of fears about the health of banks in Germany. Commerzbank’s profits and lower loan provisions were a breath of fresh air for bulls, sending its shares soaring 16% and pulling Deutsche Bank (DE:DBKGn) (who had been under pressure lately) to an 8% gain.
Currency markets have stabilized overnight following a volatile day of central bank and trading action yesterday. JPY remained the big focus with a number of meetings between senior officials including Bank of Japan Governor Kuroda and PM Abe over what to do about the yen’s big surge going in the opposite direction of what would have been expected following the Bank of Japan’s move to negative interest rates last month. A rumoured additional rate cut didn’t materialize although it’s still possible the Bank of Japan may have intervened in forex trading yesterday.
Their reluctance to act may have had something to do with Fed Chair Yellen’s comments from yesterday. Usually the second day of Fed testimony is a rehash of the first day and a non-event. This time was different. Wednesday, Dr. Yellen took a very neutral stance trying to keep her options open and trying to avoid crashing the stock market by going too dovish or igniting a dollar rally by going to hawkish. Thursday, traders focused on her refusal to rule out negative interest rates in the US even though she also suggested a reversal of last month’s rate hike is unlikely.
So what changed? After Sweden’s Riksbank cut its rate even deeper into negative territory, and threatened to intervene to keep SEK down if needed, I think the Fed felt the need to send a signal to the other central banks that it won’t stand idly by while other countries devalue their currencies at the Americans’ expense. US companies, particularly multinationals have already been struggling with the effects of a higher dollar.
Gold has pulled back a bit today but considering how high it had soared yesterday, today’s declines have been pretty moderate so far. That being said, gold remains vulnerable to a correction of recent gains. Copper, on the other hand, is staging a nice bounce up off of $2.00 another sign of improving sentiment toward the global economy.
Crude oil also appears to be finally starting to build a base. Considering how gold soared yesterday after clearing $1,200, I would have expected WTI to plunge way under $25.00 after breaking its January low near $26.60. Instead, oil have been bouncing back with WTI above $27.00 and Brent above $30.00 indicating selling may be washed out.
While there have been more rumours of potential co-operation overnight, the most encouraging sign has been reports of a truce agreement for Syria. I’ve always had trouble seeing how major producers could possibly reach an agreement on anything while fighting proxy wars against each other, so this could be an early step in the right direction. There also have been rumours of a meeting between Saudi Arabian and Russian energy officials but speculation has come and gone so we’ll see…
Today’s rebounds in stocks and crude oil appear particularly encouraging coming ahead of a long weekend in the US and most of Canada. Last month before the Martin Luther King holiday US stocks plunged as traders feared holding stocks over the weekend. Continued gains today would suggest that bearishness has become exhausted and is subsiding and confidence improving.
Today’s US retail sales report could have a big influence on how markets finish the week. Despite the big east coast storm, winter weather conditions have been a lot better overall this year thanks to El Niño and we may also see what impact lower prices at the pump are having on consumer spending.
Action in video game producer Activision Blizzard (O:ATVI) could also be interesting today. The big theme of earnings season has been companies posting strong Q4 earnings and guiding lower for 2016 and seeing their stocks hammered. Activision missed on Q4 but guided way above street for 2016 and raised its dividend, let’s see if the street is ready to respond positively to good news yet or not.