By Expert Panel 28.11.2014
Stan Shamu, Research Analyst, IG
FTSE 6715 -8
DAX 9967 -8
CAC 4378 -4
IBEX 10713 -15
MIB 20135 +34
Asia is in for a mixed finish to the week with focus primarily on the plunge in oil prices and related stocks. Big energy names in commodity heavy markets such as the ASX 200 are experiencing 6% plus drops, as investors finally succumb to the pressure from declining crude oil prices. With the next OPEC meeting only set to take place in mid-2015, pessimism is likely to grow around crude oil. Additionally the first half of 2015 could see weaker seasonal demand and it will also be interesting to see how this plays out for nations with higher breakeven levels. Traders are now looking at momentum plays and opportunities to short oil and related stocks. The ASX 200 has given up all the gains it made earlier in the week with losses skewed to the energy sector where Santos (-11%), Woodside Petroleum (-6.2%), Origin Energy (-6.5%) and Oil Search (-6.5%) have all dropped significantly. BHP Billiton is also underperforming in the materials space given its interests in crude oil. There are some bright spots in the iron ore space after the commodity snapped its losing streak. FMG and RIO are both firmer with the latter also benefitting from positive outlook comments from its investor day. Predictably transport related stocks such as Qantas and Toll are rallying on the prospect of lower fuel costs.
Japan outperforms led by transport stocks
While commodity-heavy markets are struggling, Japan has outperformed the region with a raft of releases hitting the wires. The transportation sector has jumped around 2% with big gains for airlines and shipping companies. Being a big export market, then losses for oil explorers haven’t quite trumped the benefits weaker oil prices have for Japan. Data out of Japan including household spending, inflation, industrial production and unemployment showed some signs of improvement, or stabilisation perhaps. This has proved to be a positive for equities, particularly in the financial sector. From an inflation perspective, weaker oil prices will be a threat to inflation expectations in the near term. While a weaker oil price is in theory positive for the global economy, as it encourages a wealth transfer from producers to consumers, it seems in the short term it presents significant challenges for some key central banks. Recently, we’ve heard the Federal Reserve, European Central Bank and Bank of Japan all express concerns about inflation; a key trigger for stimulus.
Mixed open for Europe
Ahead of the European open, we are calling the major bourses mildly weaker. ECB President Mario Draghi has been very vocal lately and yesterday he once again reiterated that all assets are under consideration should additional measures be required. Deflation is a key concern at the moment and today’s November euro area flash CPI report deserves some attention. We also have German, French and Spanish retail sales readings to look out for. Bad data is good for European equities at the moment as investors hope to see the ECB spring into action and announce Quantitative Easing. EUR/USD has been subdued in Asia and could be headed back to retest November lows in the $1.236 region. The US will have a shortened trading session today but activity is likely to be subdued with no data on the calendar.