TheChek News Flow

Overview

US and European stocks struggled for traction while the dollar gained ground against the euro as political and economic uncertainty on both sides of the Atlantic left financial markets trading with a mildly risk-averse tone.

Friday’s rally for financial stocks — largely fuelled by the prospect of lighter regulationof the US banking industry — ran out of steam, while the energy sector fell sharply as oil prices retreated.

Hot topic

Amid a lull in significant economic data releases after Friday’s mixed US non-farm payrolls report, the focus shifted back to the potential impact of the new US president’s policies and uncertainty around forthcoming elections in Europe, most notably in France.

Uncertainty about the legal wrangling over Donald Trump’s restrictions on travel to the US — plus fading worries about inflation — offered a helping hand to Treasury prices. The yield on the 10-year note was down 8 basis points to 2.41 per cent — 4bp below its 50-day moving day average.

The yield had finished slightly higher on Friday as an initial drop sparked by news of weak US wage growth was offset by relatively hawkish remarks by John Williams, president of the San Francisco Federal Reserve.

Analysts continued to fret about the broader implications of Mr Trump’s protectionist policies and his team’s comments on the undervaluation of certain currencies.

“The new US administration brings with it a lot of uncertainty for the future of transatlantic trade and strategic co-operation,” said the economics research team at Citigroup.

“While it may also open up new opportunities, the risks of upheaval in Europe are high, both economically and politically. The mere uncertainty about these developments may soon affect business sentiment in the eurozone and weigh on investment and growth.”

Equities

By mid-afternoon in New York the S&P 500 equity index was down 0.3 per cent at 2,290, eight points short of its recent record closing high. The financial sector was down 0.4 per cent while energy was 1.1 per cent lower.

The pan-European Stoxx 600 index, meanwhile, fell 0.7 per cent and the Xetra Dax in Frankfurt shed 1.2 per cent.

The Italian market was undermined by steep falls for banks, as concerns about the sector were reignited by UniCredit’s €13bn share sale. The bank’s shares ended 6.9 per cent lower while the FTSE MIB index shed 2.2 per cent.

In London the FTSE 100 outperformed with a dip of just 0.2 per cent as precious metal mining stocks gained ground and sterling fell against the dollar.

The mood was stronger in Asia, where investors got their first chance to reposition after Friday’s US jobs data. Japan’s broad Topix rose 0.4 per cent as a weaker yen gave exporters a lift, while Hong Kong’s Hang Seng advanced 1 per cent. On the mainland, China’s Shanghai Composite added 0.6 per cent.

Fixed income

The spread between benchmark French and German government bond yields widened to 77bp, the most for more than four years, after François Fillon, the former presidential frontrunner, defied mounting pressure to pull out of the race.

Revelations about his use of public funds to pay family members have prompted the markets to price in an increasing possibility of an election victory for Marine Le Pen of the far-right National Front party.

The yield on French 10-year paper rose 6bp to 1.14 per cent, according to Reuters data, while that on the equivalent-duration German Bund fell 4bp to 0.37 per cent.

Forex

The euro was 0.4 per cent lower against the dollar at $1.0741 — not helped by Mario Draghi’s latest comments on monetary policy.

“The European Central Bank president stressed that while the eurozone recovery is firming and headline inflation has picked up, underlying inflationary pressures are still expected to pick up only gradually,” said Howard Archer, chief European economist at IHS Markit.

“And this expectation is based on the assumption that very expansionary ECB monetary policy remains in place.

“Mr Draghi said the ECB needed to be convinced that the eurozone could achieve a self-sustainable inflation target of ‘close to but just below 2 per cent’ over the medium term before considering reducing its monetary stimulus.”

The dollar was down 0.8 per cent against the yen at ¥111.81 — its first foray below ¥112 since November — as the Japanese currency’s haven status came to the fore. Sterling was down 0.1 per cent versus the dollar at $1.2444 but up 0.3 per cent against the euro at €1.1612.

Commodities

Gold benefited from the day’s “flight to safety” trend, as it rose $12 to $1,231 an ounce, the highest intraday level since mid-November. Copper prices rose 1.3 per cent in London to $5,847 after Friday’s 1.9 per cent decline.

But oil lost ground, with Brent, the international benchmark, shedding $1.14, or 2 per cent, to $55.67 a barrel. “Oil prices have rallied back to the top end of the $54-$57 per barrel range on Brent that has held since early December,” said David Martin, commodities analyst at JPMorgan.

“Markets remain focused on political developments in Washington and the return of geopolitical risks regarding Iran to the agenda, but also on signs that [oil] markets are starting to tighten.”