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European Markets Update

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European stocks firm as Oil hits 11 year low

The dollar is a touch softer and yields of “core” government bonds a tad firmer, while gold is up $4 to $1,070 an ounce.

Activity is beginning to wane as the Christmas break approaches, with some major bourses shutting down early on Thursday, and most closed on Friday.

The Euro Stoxx 600, a pan-European equity gauge has reversed initial losses to gain 0.3 per cent, as index futures suggest the S&P 500 will recover 0.6 per cent to 2,018, when trading resumes in New York.

The S&P 500 shed 3.2 per cent in just the previous two sessions as investors grew skittish at the impact of the Federal Reserve’s first interest rate rise in nearly a decade and concerns lingered over the high-yield debt sector.

Weakness in commodities also soured the mood as resources stocks struggled and price falls for metals and energy prices exacerbated fears about soft global demand.

Monday brings mixed news in that regard: copper is up 0.5 per cent to $4,697 a tonne in a broadly upbeat base metals space; but oil remains under the cosh.

Brent crude has hit a fresh 11-year intraday low of $36.17 a barrel, down 1.9 per cent. West Texas Intermediate, the US benchmark, is slipping 1.2 per cent to $34.32 a barrel, a six-year trough, as traders fret that production cuts so far are not sufficient to eat into the crude glut.

At least the dollar is not adding to the pressure on commodities. The buck, in which many raw material contracts are denominated, is barely changed versus the euro and sterling, leaving the dollar index (DXY) flat at 98.71.

That leaves the DXY only about 2 per cent shy of this month’s 12-year peak, having been propelled higher of late by the monetary policy divergence between the US central bank and its eurozone and Japanese peers.

Policy-sensitive US 2-year government bond yields, which move inversely to the price, are up 1bp to 0.97 per cent, while equivalent maturity German and Japanese paper are minus 0.35 per cent and minus 0.03 per cent respectively.

Benchmark 10-year yields for the same countries are up 2bp to 2.22 per cent; adding 2bp to 0.57 per cent and up 1bp to 0.28 per cent.

A notable fixed income underperformer are Spanish sovereigns. Madrid’s implied 10-year borrowing costs are jumping 17 basis points to 1.86 per cent after an inconclusive general election. Spanish banking shares are lower as Madrid’s Ibex Index falls 2.2 per cent.

Earlier in Asia, Japan’s Nikkei 225 fell 0.4 per cent, adding to losses since the Bank of Japan tweaked monetary policy on Friday — an unexpected announcement that promptedconfusion as traders weighed whether or not the action represented more stimulus.

Toshiba was the worst performer in Tokyo. Its shares slumped nearly 10 per cent to a three-year low ahead of confirmation that the electronics group estimated a net loss of more than Y500bn ($4bn) for the fiscal year to March 2016, as it prepared to fix its unprofitable consumer electronics businesses.

In China, the People’s Bank of China strengthened the daily fix for the renminbi, ending a 10-session streak of weaker mid-rates that had contributed to pushing the currency to a four-year low.

“They may be trying to discourage one-way bets on renminbi depreciation,” said Larry Hu, economist at Macquarie Securities.

Equity markets in Greater China were sanguine, with the Shanghai Composite adding 1.8 per cent and Hong Kong’s Hang Seng up 0.2 per cent.


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