Stock indices fall 1% after Japan intervention pressurises commodities

<p>Weakness in commodity prices after the Bank of Japan intervened in the currency markets and concerns over China’s weaker demand to stockpile resources weighed on […]</p>

Weakness in commodity prices after the Bank of Japan intervened in the currency markets and concerns over China’s weaker demand to stockpile resources weighed on the heavyweight mining and oil firms this morning, dragging down European Indices by over 1% in early trading. The FTSE 100 lost 1.1%, whilst the DAX and CAC fell 1.4% and 1.8% respectively.

The move by the Bank of Japan in the early hours of the morning to intervene in the currency markets to weaken the yen (and thereby strengthen the US dollar), whilst not surprising in the slightest has put pressure on commodities such as copper and crude oil. This is the second major move to intervene in the foreign exchange markets to prevent the yen from strengthening too much in the last three months and whilst to some the move was fairly predictable, it is hard to see whether this phase of intervention will work any better than the last phase in early August.

Comments from Zhang Changfu, the vice chairman of the China Iron and Steel Association (CISA), earlier today that mills were unwilling to stockpile resources while demand is low and prices are high, has weighed on metal prices today, and this has had a correlated weakness in equity trade for heavyweight miners.

It is on the back of the Japanese intervention and the CISA comments that the mining sector in London has lost over 3% and it is here where we can correlate much of the energy behind the FTSE’s demise today.

Banks have also traded lower despite Barclays’ forecast beating earnings. Shares of Lloyds Banking Group and Royal Bank of Scotland were amongst the weakest equity performers on the day, falling 4%. Naturally considering this sector has outperformed over the last four weeks, rising nearly 30% from October 4 through to last Friday’s highs, the sector is prime for profit taking, particularly when risk appetite takes a back seat much in the way it has done so today.

The FTSE 350 banking sector fell 2%, dragging down the share prices of Barclays with it despite the initially stronger start after the UK bank beat forecast with a 5% jump in underlying profit to £1.34 billion, coming in slightly better than forecasts. The bank’s much maligned investment banking unit saw a 22% fall to £2.25 billion, which was roughly in line with consensus but does emphasise the difficulties major investment banking units are dealing with in the current market conditions. Barclays’ shares, which had opened higher by 2%, saw a reversal of fortunes by mid morning trade and fell 2%, tracking sector woes on the day. However, considering that prices had rallied by 50% since the start of the month, some profit taking had been due.

FTSE sees best month of gains since 1992
The adrenaline from last weeks EU Summit deal has fully waned now and the lack of detail in the methodology behind the plans is starting to weigh somewhat. The loss of momentum so quick after the EU Summit last week is somewhat troublesome and depending on how the G20 progresses in Cannes later this week, one fears that perhaps investors may start to think that after one of the best months trade for the FTSE 100 since 1992 (at the time of writing), equity markets have come too far too fast.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.