Global stock market rally runs out of steam

The latest global stock market rally is running out of steam as oil prices see more volatility and investors once again seek “safety” in gold and the yen.

Sterling continues to weaken as investors express nervousness over the prospect of the UK voting to leave the EU.

Following a generally soft Asia-Pacific session the pan-European Stoxx 600 is down 0.3 per cent and the euro is 0.2 per cent softer at $1.1001 after German business confidence hit a four-year low.

Weakness in miners sees London’s FTSE 100 fall 0.5 per cent, while US futures suggest the S&P 500 will dip 7 points to 1,939.

Since hitting two-and-a half year lows on February 11, global stocks, as measured by the FTSE All World index, have bounced 6 per cent in the previous seven sessions.

Alongside a rallying banking sector – the resurgence coinciding with news that JPMorgan chief Jamie Dimon had bought $26m of his company’s stock – one of the main causes of the rebound are stronger oil prices on hopes for production cuts.

Moves in forex, notably vacillations in the US dollar, China’s renminbi and the Japanese yen, have also swayed investor sentiment.

“As we pass the halfway mark for the [first quarter of] 2016, currencies and the oil price have been leading the stock markets,” said analysts at Jefferies.

Noting that the correlation between the oil price and equity benchmarks “has been an outstanding 0.76 so far this year” Jefferies added that: “On two occasions when the WTI [US CRUDE]price broke below the symbolic $30 level, we have seen quick recoveries.”

Energy has been choppy again. Brent crude, the international oil benchmark which jumped 5.1 per cent on Monday after the International Energy Agency said in its annual medium-term outlook that it expected the oil market to begin rebalancing in 2017, fell back before adding 0.9 per cent to $34.99 a barrel.

West Texas Intermediate, the US marker, up 6.2 per cent at the start of the week, has also been volatile, and is currently flat at $33.40.

Other growth-sensitive commodities also rallied in recent days, and now some are seeing profit-taking. Copper is slipping 0.3 per cent to $4,670 a tonne in a mostly weak base metals sector.

The pullback in resources prices is hobbling a rally in shares of commodity-focused companies, with the mood not helped by confirmation that BHP Billiton was slashing its dividend and news of a profit warning from Noble, the trading group.

Adding to the broader market’s bearish tone on Tuesday is a bounce in the yen, which is 0.8 per cent stronger versus the dollar at Y111.98. The dollar/yen exchange rate is often taken as a proxy for investors’ risk appetite, so the sight of the gauge flirting with 15-month lows is weighing on sentiment.

Japanese and Australian shares saw their early gains eroded as the yen appreciated, a move exacerbated by a weaker renminbi as the People’s Bank of China set the reference rate for the currency 0.17 per cent weaker at Rmb6.5273 per dollar.

A weaker renminbi makes Japanese goods relatively more expensive, hurting exporters there.

After initially advancing as much as much as 1.5 per cent, Japan’s Nikkei 225 finished down 0.4 per cent and Australia’s S&P/ASX 200 fell 0.4 per cent after being up as much as 0.7 per cent.

Greater China shares were weak from the outset, with the Shanghai Composite contracting 0.8 per cent and Hong Kong's Hang Seng slipping 0.3 per cent.

As equity markets wilt, so perceived haven investments such as gold attract more attention. The bullion is up $10 at $1,218 an ounce, though other supposed bolt-holes like highly-rated government bonds have lost initial gains.

Ten-year Treasury and Bund yields, which move inversely to the bond price, are up 2 basis points to 1.78 per cent and adding 2bp to 0.20 per cent, respectively.

The possibility of Britain exiting the EU continued to weigh on the pound, which is off another 0.3 per cent to $1.4110, near its softest in seven years.

Over the weekend, Boris Johnson, London's high-profile mayor, threw his support behind the Out campaign, in spite of last-ditch efforts by UK Prime Minister David Cameron to sway undecided members of his party to side with the In campaign. Many analysts think the pound will remain under pressure until the referendum in late June.

"[T]here is ample opportunity for uncertainty about the result of the referendum to weigh on sterling, especially given the UK's reliance on foreign investors to plug its large current account deficit," noted Capital Economics.

– Copyright The Financial Times Limited 2016