Hope profit taking and dollar weakness to the rescue

Summary

The midweek bounce in risk-appetite has been given a boost by U.S. data that slackens the dollar somewhat.

Value in demand

Another basis looks very much like a combination of cross-asset profit taking on bearish trades, equity market bargain hunting—with technology the main beneficiary---but with clear a ‘value’ bias nonetheless– see the rise in buying interest for Dow shares like Boeing, Nike, Cisco, Caterpillar and others – plus, the oil price bounce which stabilizes related shares.

Retail reckoning due

There are plenty of reasons for the week’s overall stock market weakness to linger. For one, the retail industry remains in focus after a spate of warnings from large U.S. retailers raised the stakes for the all-important holiday season. Investors will soon gauge whether or not traditional promotional activity accompanying Black Friday, Cyber Monday and offshoots could do more harm than good to some of the most challenged operators. Sentiment on U.S. retailers appears to be falling at a faster rate than in the rest of the developed world. Forward price/earnings ratios of around eight of the largest trail a circa 20 times aggregate rating derived from Refinitiv data. Most of these U.S. leaders also sport an operating margin some 2 or 3 percentage points below the global average of about 6%. The resumption of U.S. business after Thursday’s Thanksgiving break will play a strong part in setting the tone for the end of the week and the next.

Oil tries a bounce

Both key crude oil contracts are also holding gains past Wall Street’s open. The notion that OPEC, led by Saudi Arabia will move towards a formula that restricts supplies once more is gaining precedence in the market ahead of the organization’s official meeting early next month. Furthermore, the larger than expected draw down in U.S. crude oil storage reported last night helps steer demand assessments in a more favorable direction. The broader weekly inventory picture on tap later from the EIA probably needs to corroborate the API’s data for the improved tone in Brent and WTI to be sustained for the rest of the session. They were last up about 2% a piece, though down some 26% and 28% since the beginning of October. Those slides will take much more than one or two promising readings to arrest sustainably.

Dollar slip lifts euro, sterling ceiling

Weaker than forecast durable goods and weekly claims data softened the dollar. Cue an additional, non-corrective lift for the euro and sterling, which have continued to creep higher this week despite Italy’s Budget and Brexit. Sterling’s lightness remains as difficult as ever to square with reality. The pound’s stability appears to suggest Theresa May’s trip to Brussels may provide the opportunity of additional amendments. In reality, the visit is more of a rubber-stamping exercise with no further discussion planned or likely. Parliamentary arithmetic still bodes ill for the Brexit deal after a likely endorsement without material alterations at the emergency EU summit this weekend.

Rome, Brussels stand-off hardens

In Italy, further marginal reaction across yields, the euro and Italian shares followed the European commission’s formalised rejection of Italy’s unchanged budget, though the move was not a surprise. The EC also called for a “disciplinary procedure”, paving the way for possible fines. Additional comments by the League’s Matteo Salvini fleshed out the reiteration of his well-flagged position. He is open to dialogue on investments but not on the Budget deficit or pension reform. This leaves fewer doubts that Wednesday’s relief rally in Italy is best viewed as a pause. The Commission has after all, in its own byzantine way, begun the process that will crystalize the political stand-off in a way that the market is unlikely to react in sanguine fashion to. What happens next: The executive arm has formally invited eurozone countries to examine its assessment of Italy’s budget in a fortnight. If consensus is reached,  the "excessive deficit procedure" will begin.