Price action in equity markets was a little muted given that it was a public holiday in much of Europe. An upbeat tone following Federal Reserve meeting minutes was turned a little sour by OPEC. Shares on Spain’s IBEX index were outperformers after the country’s growth accelerated at the start of 2017 to make it Europe’s fastest growing economy. US stocks opened higher, building on record highs made on Wednesday. Shares of Best Buy (NYSE:BBY) soared double digits on sales boosted by the new Nintendo Switch console.
Oil traders reacted to a well-telegraphed nine-month extension to the current output cuts from OPEC by taking profits. The mini crash in oil prices this month forced OPEC to pre-announce the plans so the announcement itself was a foregone conclusion. We said in our commentary May 15 that “An output extension has been widely expected so oil markets remain at risk of another crisis in confidence.”
Tellingly, oil prices have not fully recovered the highs reached after the supply cuts were announced last November. The persistently high US oil production has added skepticism in the market that wasn’t there at the last OPEC meeting. We see a better than 50/50 chance OPEC pre-announces additional cuts before the next scheduled meeting in November.
FTSE weighed down by oil and gas
The FTSE 100 received a short-lived shot in the arm from soft first quarter UK GDP data, which sent the pound lower, boosting the value of foreign company earnings. A downturn in the heavily-weighted oil and gas shares following the OPEC announcement was the difference-maker. The FTSE 350 oil and gas sector was at one point down by over 1% on the day. Shares of EasyJet (LON:EZJ) took off for a seventh straight day of gains despite its half-year loss widening thanks to a weaker pound.
Pounded by soft UK GDP
The British pound suffered another setback near the critical 1.30 level against the buck after final Q1 UK GDP data indicated a dramatic growth slowdown in the first quarter. The 0.2% expansion came short of previous estimates of 0.3%, well down on the 0.7% in the fourth quarter of 2016. The slowest household spending in three years as well as a fall in exports were a significant drag. Some solace can be taken from signs of a seasonal effect whereby the first quarter has been poor for the last three years. We think any resulting softness in Sterling will be short-lived as long as the politics trumps economics in the run up to the general election.
Dollar firms in wake of minutes
Federal Reserve minutes kept a June rate hike on the table but showed no rush to normalize the QE-bloated balance sheet. Another rate hike beyond June was questioned by the suggestion it is “prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory”. The dollar’s outlook is clouded because it’s still unclear if the Fed will halt rate-increases as it unwinds the balance sheet.