European markets mixed but Spain soars
Spain ended as the standout performer among European markets, despite the uncertainty over the standoff between Madrid and the Catalan independence seekers. At the very least, the demand for clarification over the independence situation meant the immediate tensions have been defused. David Madden, market analyst at CMC Markets UK, said:
The stalemate between the region and the Spanish government is still ongoing, but the news that the region isn’t rushing for the exit has lifted investor confidence. We don’t have any clarity as to how the situation will develop from here, but at least the market can be confident of political stability in the country. Dealers may become nervous again when the separatists try and pursue their agenda, but at the moment normality has returned to the Spanish market.
Overall in Europe, the final scores showed:
- The FTSE 100 finished down 0.06% or 4.46 points at 7533.81, but it is still just 14 points or so below its closing peak
- Germany’s Dax edged up 0.17% to 12,970.68
- France’s Cac closed down 0.02% at 5362.41
- Italy’s FTSE MIB rose 0.97% to 22,552.21
- Spain’s Ibex ended up 1.34% at 10,278.4
- In Greece, the Athens market lost 0.85% to 748.61
On Wall Street, the Dow Jones Industrial Average is currently up 21 points or 0.09%.
On that note it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.
Despite the rally in Japanese and Spanish stock markets, it has been fairly lacklustre elsewhere. Chris Beauchamp, chief market analyst at IG, said:
It hasn’t been the busiest day in global markets, despite further developments in the Spain/Catalonia situation. A lack of heavy data and earnings has characterised the week thus far, although with US banks on the calendar for the next two days that is about to change.
Weakness throughout the morning was replaced by small gains, as the Spanish response to the Catalan (sort of) declaration of independence came in the form of a gentle, ‘could you possibly clarify that?’ from prime minister Rajoy.
Catalonia now apparently exists in a state of limbo, having declared and then suspended its independence, while Spain has said it might think about activating Article 155. The irresistible force has met the immovable object, and stalemate has resulted. The lack of any drama has meant that, outside the Ibex, the market reaction has been limited
Back with the rise in the Japanese stock market, and this may not be the end of it, according to Trevor Greetham, head of multi asset at Royal London Asset Management. He says:
Japan’s stock market has hit a two decade high but we think it has further to run. The economy is picking up, corporate profits are being upgraded and the central bank is on the side of equity holders – unusually they have pledged to overshoot their inflation target of 2% and are keeping policy very loose until they get there.
This policy commitment makes Japan’s stock market a useful hedge against possible losses on bond portfolios if US interest rates continue to rise as we expect. Japanese long term rates are pinned down close to zero. Whenever US bonds sell off, widening interest rate differentials weaken the yen and boost the export-oriented Nikkei.
It is for this reason that I have been overweight Japanese equities in multi asset funds but underweight the yen since this element of Abenomics was first announced. We don’t expect the snap election to change things for the worse. If anything, an opposition win could result in the abandonment of planned sales tax rises, resulting in even looser fiscal policy.
Global central banks have begun to start switching off the money taps which have been supporting the world economy and stock markets since the financial crisis.
The US Federal Reserve has already begun raising interest rates, with another increase possible before the year end. The Bank of England is hinting at a rise in November despite an uninspiring UK economic performance, and the European Central Bank is looking at tapering its bond buying programme.
So could these moves disrupt the global recovery? Capital Economics’ Vicky Redwood says perhaps not:
We expect global growth to slow only modestly as the era of easy money starts drawing to a close. The monetary tightening is set to be gradual, limited and staggered, with some countries only starting to tighten as others are finishing. And the relationship between interest rates and GDP growth has generally been weak. But with debt still high, the world economy would struggle with a much bigger tightening.
The backdrop to this tightening is a reassuring combination of faster economic growth and low inflation. The world economy was only hit hard before when rates were raised abruptly to dampen high inflation. And although reversing quantitative easing is an added complication this time, central banks have already taken key steps along the path of monetary tightening with little effect on the economy or the markets.
What’s more, the tightening should be gradual. It is unlikely to be closely synchronised – we expect a gap of over three years between the first rises in US and euro-zone interest rates. And it need not be that big; neutral interest rates have fallen and central bank balance sheets are unlikely to return to pre- crisis levels. We think that, at most, half of the post-crisis loosening in monetary policy will get reversed
But there are risks:
Even a gradual approach to tightening may prove to be too much if demand is more fragile, or markets more nervy, than we think. And if central banks need to back-track, they have limited ammunition with which to loosen policy again. The gradual approach also risks inflating asset bubbles further, storing up trouble for the future.
There is also a risk that a slow tightening simply turns out to be infeasible if inflation takes off, leading policymakers to tighten policy more rapidly than they have signalled. With debt to income ratios still high, and saving ratios low, a sharp rise in interest rates would make us significantly more worried.
Opec lifts oil demand forecast
Elsewhere Opec, the organisation of petroleum exporting countries, has forecast higher demand for its oil in 2018.
In its monthly report it said the world would need 33.06m barrels a day of its crude next year, up 230,000 barrels from its previous forecast. It suggested that its agreement to curb output was helping to get rid of a supply glut. But it does not expect prices to surge, forecasting that crude will remain between $50 and $55 a barrel in the next year.
Brent crude is currently down 0.11% at $56.55.