On 02 December, 2015 – European markets were mixed on disappointing inflation data

Stocks were mixed the day before the European Central Bank’s monetary policy announcement. Investors also carefully parsed remarks by Federal Reserve Chair Janet Yellen regarding the health of the US economy Wednesday afternoon (US ET).

United States

Markets were mostly lower Wednesday ahead of a European Central Bank meeting where further stimulus is expected to be announced as well as a speech by Fed Chair Janet Yellen. Energy stocks slid lower along with the price of oil. The Dow Jones industrials were down 0.9%, the S&P declined 1.1% and the Nasdaq lost 0.6%.

Shares of oil and gas companies followed crude oil lower, making it by far the worst performing part of the market. Exxon Mobil, Chevron and the drilling rig operator Transocean tumbled. Qualcomm jumped after the company announced a patent deal with a Chinese mobile phone maker. Yahoo shares climbed on reports that the company is considering selling its core Internet businesses. Yahoo has struggled for many years to re-energize its business model. The company’s stake in the Chinese e-commerce giant Alibaba, worth US$30 billion, makes up the vast majority of Yahoo’s overall market capitalization of US$33.6 billion.

Speaking to an economics group in Washington DC, Fed Chair Janet Yellen said economic growth is strong enough to lead toward maximum employment and that risks tied to global factors had eased since the volatility of August. On the inflation side, she notes a welcome but still early increase underway in wages and believes that deflationary effects of low oil and low import prices will diminish in 2016. Still, she concedes that the Fed has yet to make significant progress on inflation. She also sees some slack still available in the labor market and finds risks to growth and employment "very close" to balanced. And, in a reminder that there are more data to come including Friday's employment report, she notes that additional data yet to be released will bear on the outcome of this month's FOMC.

In questions and answers, Yellen repeated that policy makers do not have a mechanical plan for raising rates and that the path is not predetermined and will be based on the unfolding of economic data. Though she does encourage a consensus, she said the decision to lift off will not require unanimous assent. These latter comments underscore how delicate the decision still is, that arguments on both sides are strong. Markets were little changed following her comments.

The Beige Book, prepared for the December 15 & 16 FOMC meeting, depicts a healthy economy and does not stand in the way of liftoff. Nine of the 12 districts reported either modest or moderate growth. Only Boston reported slowing economic conditions. In sum, the economy may not be roaring but, based on this description, is strong enough to warrant normalization of monetary policy.

These data reflect observations at 4:00 PM US ET. Gold at the afternoon London fixing dropped US$10.00 to US$1,055.40. Copper futures were down 1.3% to US$2.05. WTI spot crude was down US$1.75 to US$40.10. Dated Brent spot crude was down US$1.84 to US$42.60. The US dollar was up against the euro, yen, pound and the Australian dollar. However, it declined against the Canadian dollar and the Swiss franc. The Dollar Index was up 0.2%. The yield on US Treasury 30 year bond was unchanged at 2.91% while the yield on the 10 year note added 3 basis points to 2.18%.

Europe

Stocks were mixed Wednesday in choppy trading. Investors were nervous ahead of Thursday's announcement from the European Central Bank. The disappointing Eurozone inflation data contributed to those concerns. Investors are expecting the ECB to announce a rather substantial package of stimulus measures. Traders have begun to worry whether the ECB can deliver enough stimulus to satisfy expectations. The FTSE added 0.4% and the SMI gained 0.3%. The CAC lost 0.2% and the DAX was 0.6% lower.

November’s flash harmonized index of consumer prices was up 0.1% on the year for a second month. Excluding food, alcohol, tobacco and energy, the yearly rate dropped a surprisingly large 2 tenths to 0.9%, fully reversing October's gain.

Volkswagen was lower on a S&P downgrade. Both Deutsche Bank and Commerzbank retreated. Salzgitter and ThyssenKrupp declined. ArcelorMittal sank after Vale forecast a further slump in steel prices next year. AstraZeneca and GlaxoSmithKline jumped after broker upgrades. Roche advanced in Zurich on a broker upgrade. Sage Group advanced after it reported full-year results. Greene King surged after it reported that its first-half pre-tax profit climbed 18% to £84.9 million from last year's £72 million. Mining companies including Anglo American, Rio Tinto and Glencore declined following a decline in copper prices on a stronger dollar and worries over demand in China.

Asia Pacific

Shares were mixed Wednesday as investors waited for the European Central Bank announcement on Thursday (but after markets here will be closed for the day). However the Shanghai Composite jumped 2.3% — the most in nearly a month — as hopes build for broad stimulus measures from Beijing. The Hang Seng added a more modest 0.4%.

Analysts think that Beijing will introduce more stimulus measures as soon as year-end, as it seeks to reach its growth target of about 7% for 2015. An official reading of Chinese manufacturing activity Tuesday fell to its lowest level in more than three years Tuesday. Speculation has built about what shape that stimulus could take. The People’s Bank of China has cut interest rates six times since last November and lowered the amount of reserves banks are required to hold a number of times. On Tuesday, such expectations drove a rally in Chinese property shares, after reports circulated that stimulus measures could target the real-estate market, including a potential cut to mortgage down payment ratios for first-time home buyers.

The Nikkei declined 0.4%. Major decliners included glass & ceramics and pulp & paper shares while construction and communication & information led advances. Upbeat domestic sentiment following strong Japanese capital spending data released on Tuesday had given some investors enough incentive to remain buyers. But hesitancy ahead of overseas economic events including a speech by Fed Chair Janet Yellen (Wednesday) and an ECB policy announcement (Thursday) kept stocks in a tight range.  

The S&P/ASX was down 0.2% and the All Ordinaries slipped 0.1%. Third quarter GDP expanded 0.9% from the second quarter and 2.5% from the same quarter a year ago. The Kospi was down 0.7% while the Sensex retreated 0.2%.

Looking forward

Australia posts October merchandise trade balance. November composite PMIs will be released for Japan, India, the Eurozone, France and Germany. Services PMIs will be reported for the UK and US. Eurozone October retail sales and French third quarter ILO unemployment also will be posted. The European Central Bank announces its monetary policy decision. In the US, weekly jobless claims, money supply and Fed balance sheet will be reported. Fed Chair Janet Yellen testifies before the Joint Economic Committee in Washington.

Please remember, the value of investments and the income from them can do down as well as up. Funds that invest in overseas markets may be subject to currency fluctuations. Investments in small and emerging markets can be more volatile than other overseas markets. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only