European Stocks Rally

Good Morning,

Market swings are expected to persist in the following weeks after yesterday’s mixed trading saw European indices rise significantly yesterday after a difficult seven day selloff. The closely followed EuroStoxx 50 recuperated 2.25% through yesterday’s trading session to reach the 3049.99 again. The UK’s FTSE 100 saw similar gains as it added 2.41% to reach 6331.83. Germany’s DAX was the biggest winner as it rose by 2.46% to reach 9563.89 whilst the Spanish Ibex and the French CAC40 added 1.8% and 2.19% to reach 10081.90 and 4093.20 respectively. The indices recorded the biggest gains since the 5th of December. Yet again, automakers saw significant increases in their stock valuations as the sector continues to feel the positive ripple effects from the drop in oil prices. Furthermore, according to the European Automobile Manufacturers’ Association, European registrations rose 1.2%, reaching 989,457 vehicles in November. The data for the same month stood at 977,607 in 2013.

On the basis of what has been said above, one could argue that this 7 day plunge in market valuations may indicate a possible entry point for investors who look for exposure to equities within the Euro area in their portfolio. Surely one cannot argue against the idea of slowly drip-feeding funds into the market in order to be able to participate in further upside, whilst still holding ammunition in case the sell-off had to continue. Investors may also consider entering the market through diversified investment vehicles through which they can reduce direct exposures to one single company.

Meanwhile, the Russian rate hike (as described in our article/blog yesterday) appears to have failed in stopping the Ruble selling off. The plummeting oil prices together with the effects of the imposed economic sanctions appear to continuously overcome any action Russia adopts to try and safeguard the value of its currency. This volatility and loss in value of the Russian currency has led Apple to halt its online sales in Russia “due to extreme Ruble fluctuations”. In addition, further pressure was put on the oil price, this time from China as disappointing Chinese data increased doubts of a possible rebound in prices through an increase in demand for oil.

Trading in the US did not mirror the developments in Europe. The three major indices ended their sessions in the red, with the Nasdaq index leading losses by trimming 1.24% to 4547.84. The S&P500 shed 0.85% to close at 1972.74 whilst the Dow Jones Industrial Average lost 0.65% to reach 17068.87. it was another mixed day of trading yesterday, as the closely followed S&P500 was down almost 1% in the first ten minutes of trading. It then recovered, adding 1.4% as energy stocks valuations improved, only to repeat this movement for a second time, closing off in negative territory towards the final hour of trading. This movement in the index could give us further insight into what to expect in the coming weeks. Analysts believe that investors could be in for a rough ride if oil prices continue to plummet whilst the Fed may continue to indicate that benchmark rates may rise sooner than expected. In light of this, all eyes will be on the outcome of the FOMC meeting later this afternoon.

Contrary to this however, one may also be led to believe that this a rise in benchmark rates may not materialise given the fact that the Fed, like all market participants, would have been closely following the oil developments taking its toll on the markets. Surely, we will also have to wait and see the inflation figures published today this afternoon, together with those relating to the next few months, as these would have a great effect on the Fed’s decision.

Furthermore, even though investment portfolios may be relocating and investment strategies revised, one should not rule out the positive effect that the drop in oil price may have on inflation. Future data will be important information for investors to determine whether any increase in demand may translate into increase in price indices.

Have a good day,

Karl