With the economy expanding to 3% and with interest rates at low levels, many companies are tempted to expand through mergers. With funding rates at historically low levels, a merger or acquisition may be the fastest route for a company to increase its size and market share.
In US the budget committee warned that the proposed Republican tax reform would increase the public deficit by more than 300,000 M.USD than estimated by this proposal. Accordingly, the deficit threshold approved by the Senate (1 500 000 000 M.USD) would be exceeded. Today’s session is expected to be conditioned by the behavior of oil, the presentation of the results of some retailers such as Kohl’s and Macy’s (which signals the end of the earnings season), possible developments regarding the tax reform and news related to the visit President Trump to China.
Last Friday European markets resumed trading under selling pressure. The bottom line of this downward movement is more about more technical factors (the profit taking after strong gains in recent weeks) than on macro or microeconomic issues.
European stock markets ended lower, with most sectors reporting this behavior. The financial sector was among the worst performers, with investors worried about US tax reform. In Paris, EDF depreciated, after lowering the estimates of results and cash flow for 2018 due to the lower expected energy consumption, the lower availability of some of its nuclear reactors at the beginning of 2018 and a decrease in the capacity of compensation in Great Britain. Meanwhile, oil prices traded slightly higher, after OPEC raised its prospects for oil demand in 2018.
Mario Draghi will be present today at an important forum organized by the ECB, which will also include the Governor of the Bank of England, the Governor of the Bank of Japan and the Governor of the FED Charles Evans. Mario Draghi’s intervention is scheduled for 10:00 a.m. Mario Draghi’s words could be a catalyst for debt markets and could dictate the yield trend today.
Oil declined after the International Energy Agency cut its oil demand projections to 2017 and 2018. These projections slightly cool the positive sentiment that was being built around it but also serves as a justification for several investors to realize capital gains after the strong gains accumulated in recent weeks. In fact, from 9 October to 7 November, Brent appreciated 16%. The weakness of oil is also negatively affecting other industrial commodities, so the mining sector may also be under pressure.
The Fed announced they are ready to move in December with one rate hike and they did announce it beforehand so that it wouldn’t be a surprise to the market environment.
At the sectoral level, the oil stocks could be one of the highlights of the session. Yesterday, DJStoxx Oil & Gas suffered sharp losses after the Norwegian sovereign fund informed it would withdraw its oil stocks from its benchmark. Norge Bank is the largest sovereign fund in the world, managing around 1 000 000 M.USD. The fund is fueled by oil revenues and aims to generate returns (through investment in financial assets) for future generations, when oil exploration is gradually losing ground.
The week of Thanksgiving is usually favorable to stock markets. In fact, since 1945, the S&P ended that week up in 75% of that period, with an average valuation of 0.64%. Interestingly, in the years that the S&P has accumulated gains over 10% (as in the current year), the average Thanksgiving week gain rises to 0.84%.
Oil prices rose on the back of rising expectations that the OPEC meeting scheduled for next week will allow the cartel to prolong cuts to oil production currently in place.
In the commodities sector, the price of oil rose in international markets (in the US it already surpassed the 58 USD a barrel barrier for the first time since July 2015), driven by the growing expectation of a decision to cut output during the OPEC meeting scheduled for next week. In addition, the news about the interruption of production in a pipeline in Canada, which implies an 85% cut in the supply of this raw material to the US, also contributed to its upward trend.
Today was marked by a weak activity in the European markets, explained by the closing of the American stock exchange, due to the celebration of the “Thanksgiving” in the country. Thus, the variations in the main stock indexes were quite contained, and the utilities sector was negatively highlighted, due to the announcement of some business results.
In the pre-opening, the European markets traded in slight rise. The weak activity and low trading volume, explained by the holiday season in the US (associated with Thanksgiving), should continue to mark today’s session on European markets. The agenda of corporate results and the agenda of macroeconomic indicators haven’t relevant events for today, so the focus should be on the continuing political uncertainty in Germany and on business news that may arise throughout the day.
On Monday, Britain’s Micro Focus suffered a heavy loss after Deutsche Bank cut its recommendation to buy to keep.
Oil companies have been among the best performers in the hope that OPEC members will be able to extend the cut-off on crude oil production.
Asian markets ended with some gains, with the potential positive effects of a hypothetical US tax reform approval overlapping with yet another North Korean ballistic test. Although the US tax reform has as its main objective to boost the domestic economy, the potential increase in household income should also benefit products imported from Asia. Yesterday some Japanese newspapers had anticipated a ballistic test by North Korea which, according to regime propaganda, could hit the United States.
Asian markets ended lower, penalized by weakness in the technology sector, which was plunged by the steep fall in Nasdaq. In Tokyo, the weakness of technological Stocks was more than offset by the appreciation of the banking sector. It also notes the rise in interest rates in South Korea (the first in 6 years) and the release of the PMI index in China. The PMI index for manufacturing industry in November reached 51.8 against the estimated 51.4. At the services level, PMI stood at 54.8 compared to 54.3 in October.
On the daily chart of gold we can see that the precious metal has been boxed between the 200 day EMA at the 1270 level and the 1300 level. If we see a rise of volatility close to a support or resistance zone, the commodity may be getting ready to take off.
The US Senate passed a string of fiscal measures aimed at increasing American incomes by a very small majority (51-49). Postponing the description of the main measures of this document to another time, the issues that its approval places are described. The first is the time it will take to reconcile with the proposal passed in the House of Representatives. The second is to try to anticipate (as much as possible) what the real effects will be on the real economy. The third concerns the impact it will have on the public deficit. If it is very significant, it may imply a generalized rise in yields, which will cause a profound change in the global stock market situation. The fourth, which depends a little on the others, is to know how much of the positive effects of this reform have been anticipated by the extraordinary rise of American markets in recent months.
Most European markets ended on a downward trajectory, with investors reacting to the global downturn in technology stocks. The London exchange was one of the exceptions to this negative behavior, since it recovered from the initial losses. In addition to the technological sector, whose trend was influenced by the performance of the North American peers, the banking and automobile sectors were also under pressure.