Uncertainty in Stock Markets Fueled by Crude Fluctuations

Kristian Rouz – With mainland China attempting to spur the economy and the US robustly expanding, the world might soon see a pickup in general economic activity and further accumulation of wealth.

Global stocks were mixed Friday with bright spots in Japan and Europe, bolstered by strong corporate and macroeconomic data, and mainland China. A significant advance in the latter’s bourses in best explained by political factors, as next week the Communist nation will host the annual meeting of People’s Congress, possibly resulting in the widening of monetary stimulus. The rest of Asia-Pacific was in the red, mostly due to sharp fluctuations of crude oil prices in the US, plunging more than 5% overnight, only to rise by 2% early in the morning. The US dollar slid, however, it is poised to recover as greenback bulls are seemingly encouraged by the US inflation data, posting higher than expected results this past Thursday.

In the early hours Friday stocks in Asia-Pacific posted aggressive gains, with market’s participants expecting the biggest gains since September 2013, driven by expectations of stronger consumer confidence. However, as corporate data, including earnings reports, arrived by mid-day, most bourses ended the day in the red, save for Japan and mainland China.

The MSCI Asia-Pacific Index retreated 0.1% in Hong Kong, This outgoing month, the MSCI APEX advanced 4.2%, having expanded by 0.9% this week alone. The main factors behind such robust gains were an agreement between Greece and its international creditors to extend the bailout program by another four months, as well as this week’s US Fed chair Janet Yellen’s testimony which persuaded investors the regulator would pursue milder monetary policies till at least June.

Among corporate equities, Australia’s chain of supermarkets Woolworths Ltd. Lost 9.5% of its valuation due to a weaker profits forecast. Commodities giant Noble Group Ltd. depreciated by 7.1% as raw materials are becoming a less profitable business amidst concerns of weak global growth.

Videogames and casinos advanced though. With Japan’s Nexon rallying by 9.7% and Hong Kong’s Sands China adding 2.3% after 13% of losses during past several days.

Such mixed dynamics in corporate earnings reflected on general stock markets. Japan’s Nikkei 225 hit yet another 15-year high. The index added another 0.1%, extending its February gains to 6.4%. On Friday, Japan published its industrial manufacturing data, beating previous estimates of 2.7%. The nation’s industrial production rose by 4% annualized, while inflation rose 2.2% in January year-on-year, slightly below the earlier anticipated 2.3%. The broader Topix index rose 0.1% as well on the optimistic news. ‘Abenomics’ has proven to be a sound strategy, as at this point one might say, Japan is not on the brink of deflation, and manufacturing growth is solid.

The Korean Kospi Index slid 0.4% after seven days of gains, Hong Kong shares lost 0.3% despite gambling gains as Beijing failed to deliver a clear message to investors of its future monetary policies so far. The Hang Seng ended the week flat. Some 1.6 bln shares changed hands today in Hong Kong.  Stocks in Malaysia and Thailand retreated.

The SingaporeStraits Times retreated 0.3% as well, while mainland China posted gains. The Shanghai Composite edged 0.4% up as investors are looking forward to next week’s meeting of National People’s Congress, which might pour additional money liquidity in the markets. In New Zealand, NZX 50 extended its record high, having added 0.3%. Australia’s S&P/ASX 200 was rocky, adding 0.3% after a retreat of 0.6%.

"Stimulus seems to be working a treat for some of the key markets around the world, including Japan and the Eurozone. Recent data out of Europe has also been showing some positive signs and this has really encouraged investors to drive equities higher," Stan Shamu of the Melbourne-based IG said.

European shares have rallied Friday, driven by a 6% appreciation in equities of Airbus Corp. The supranational aircraft-maker reported a significant increase in operation profits. Consequently, the pan-European FTSEurofirst 300 Index added 0.3%, extending its seven-year high. The index of top European shares advanced by 14% from the 1st of January ina robust rally. European markets have been overpriced though, driven mainly by the European Central Bank’s (ECB) monetary easing, and good news from Greece. The ECB will start a full-scale Quantitative Easing program in early March, weighing on the euro valuation against other currencies.

The US dollar retreated today by 0.2% to 119.14 yen, having risen by 0.5% overnight. Crude oil in the US plunged by 5.5% overnight, rebounding by 1.8% in the morning. Note the inverse dollar-crude ratio.

Meanwhile, US growth in Q4 might be revised down to 2.1% from the current preliminary reading of 2.6%. If that happen, the dollar will retreat further.

"As growth in the upper range of 2% is the Fed's prerequisite for an early and sustained rate hike, a figure just around or below 2% is likely to hurt expectations for a June hike and weigh on the dollar," Masafumi Yamamoto of the Tokyo-based Praevidentia Strategy said.

The euro added 0.1%, but is still near its lowest, at $1.1212. Energy prices have been most recently supported by disruptions in supply from the North Sea, as well as the yet another Russian-Ukrainian warning over natural gas supplies.