FTSE hits three year low amid falling oil and Fed Week jitters – business live

Graeme Wearden (until 2.15) and Nick Fletcher

from on 2015-12-14 17:54 (#XMD2)

All the latest economic and financial news, as investors brace for Wednesday's Federal Reserve meeting.

5.54pm GMT

It was another volatile day for investors, with oil prices hitting new seven year lows and Brent crude coming close to its lowest since 2004 before making a recovery. Traders were also nervous about the prospect of the US Federal Reserve agreeing the first interest rate rise for nearly a decade when it meets later this week. So the closing scores showed:

4.38pm GMT

Leading shares in London have closed at a three year low after the continuing plunge in the oil price, and nervousness ahead of the US Federal Reserve meeting.

The final scores showed the FTSE 100 down 1.3% at 5874.06, its lowest level since early December 2012.

4.14pm GMT

Markets are still under pressure ahead of this week's US Federal Reserve meeting, as oil prices remain weak.

With Brent crude now down 1.7% at $37.27, the FTSE 100 has now lost 1% while the Dow Jones Industrial Average is down 100 points or 0.6% Joshua Mahony, market analyst at IG said:

Oil prices continue to dominate trading, with the FTSE 100 exhibiting major volatility and unpredictability in a largely mixed session today. Arguably, the correlation between oil prices and the FTSE is as strong as it ever has been, and with oil breaking towards multi-year lows, this is not a good sign for stocks. The positive influence felt by strong Chinese data overnight is all but forgotten by now, and instead the feeling is that markets are nervously preparing for the Fed decision. For that reason, the choppiness seen today could provide a format for future trading as we head into Wednesday's announcement.

4.05pm GMT

If the UK votes to leave the European Union, it would have a moderately negative effect on its credit rating, according to Fitch. The agency said:

[A vote to leave would raise] risks to [the UK's] medium-term growth and investment prospects, its external position, and the future of Scotland within it. Longer term, the economic impact of leaving the EU is highly uncertain, but the impact on the rating dynamics would be less pronounced as many of the UK's key rating fundamentals would remain intact assuming UK-EU trade relations are not meaningfully disrupted.

We forecast the UK referendum on EU membership to be held in the second half of 2016 following negotiations around the UK government's proposals for reform. Our baseline is that the UK will remain in the EU, but the risk of "Brexit" is significant.

3.38pm GMT

Well that didn't last long. After a reasonable opening, US shares are trading lower as the oil price continues to slide towards eleven year lows. Added to that there has been some volatility on the S&P 500, supposedly due to high frequency trading.

So the Dow Jones Industrial Average is down 49 points or 0.2%, the FTSE 100 has fallen 0.8% and Germany's Dax is down 0.7%. As for oil, Brent crude is down around 2% at $37 a barrel, now far off its 11 year intra-day low. Connor Campbell at Spreadex said:

Whilst not at its 4% nadir, a 2% drop for Brent crude has continued to weigh on the markets this Monday, pushing the previously positive global indices into the red as the day wore on.

Given the state of oil, and the gradually deepening shade of red in its commodity sector as a whole, it is fairly remarkable that the FTSE is only down by around 50 points at this point in time instead of facing a hefty 3 digit decline.

3.27pm GMT

Here's an interesting table from M&G's retail bond team comparing the economic situation the last time the US Federal Reserve raised interest rates to the position now:

Key economic/market levels today vs start of last Fed tightening cycle. Very different, except oil at $36 pic.twitter.com/kW3Ef9kir7

3.25pm GMT

Meanwhile in the currency markets, sterling has hit a seven week low against the euro at 72.79p as the single currency gained ground across the board.

2.48pm GMT

Despite the concern about the falling oil price, it should not have too great an effect on the global economy, according to Capital Economics. It said:

The latest slide in the price of crude oil is clearly unsettling the financial markets, but it should not materially affect the prospects for the global economy. Even if prices remain below $40 per barrel, this would not prevent inflation from rebounding next year. What's more, as the latest slide mainly reflects developments on the supply side, the fall in oil prices is not a signal of weakening economic activity...

In contrast to the dip in August, which was driven by concerns about the impact of developments in China on the demand for oil, the latest slide is largely due to the inability of OPEC to agree any formal target for supply. The recent fall in oil prices is not, therefore, a sign of renewed fears about global growth, let alone an indication that the world is slipping back into recession.

2.38pm GMT

Ahead of Wednesday's key US interest rate decision and amid oil prices sliding towards 11 year lows, the American stock market has managed to open on a positive note.

The Dow Jones Industrial Average is up around 50 points of 0.2% in early trading, giving some support to European markets, which are off their lows of the day. The FTSE 100 is up 0,2%, while Germany's Dax is down 0.3% and France's Cac virtually unchanged.

2.15pm GMT

Don't panic!

So says David Kelly, chief global strategist at J.P. Morgan Asset Management, to investors who are flapping about the prospect of a US rate rise on Wednesday night.

This week sees the release of the November CPI report which could show core CPI inflation rising to 2.0% year-over-year. A strong report on Housing Starts on Wednesday should offset weaker reports on manufacturing in the shape of the Industrial Production numbers for November and the Empire State and Philly Fed Indices for December. Flash Markit PMI numbers for the Eurozone, the U.S. and Japan should show more stability in manufacturing and more growth in services. Meanwhile, Unemployment Claims on Thursday should remain well below 300,000, indicating a still-tightening labor market.

"If the numbers pan out this way, it will confirm that the U.S. economy is clearly healthy enough for the Fed to begin tightening.

1.46pm GMT

Time for a recap of the key points so far:

A volatile morning's trading in Europe has seen the oil price come close to hitting an 11-year low, as investors brace for a historic US rate rise this week.

Next big level for Brent is the 2008 intraday low of $36.20 and for WTI $32.40. On a closing basis it is $36.61 for Brent and $33.87 for WTI

1.18pm GMT

The slump in the oil price is going to drag on inflation rates, and make central banks even more nervous about tightening monetary policy.

Peter Rosenstreich, head of market strategy at Swissquote Bank, believes it will prevent the Fed from hiking rates more than twice next year (assuming we get a rate rise on Wednesday):

The recent fall in oil prices should only increase the deflationary forces at work in the US, which have created a noticeable outlook divergence between the Fed and the market.

We are at the dovish-end of the spectrum calculating only two 25bp hikes in 2016, bringing the target range for the Fed Funds rate to 0.75 - 1.00% by year-end.

1.00pm GMT

Brent crude is now down 4%!

This is pushing the cost of a barrel of North Sea oil very close to the financial-crisis-era low of $36.20, set in late December 2008.

Brent crude oil just one big algo trade from breaking the 2008 intraday low of $36,20

12.52pm GMT

The sight of the oil price falling another 3% today, towards its post-crisis lows, is causing alarm in the markets.

The Financial Times has a good quote:

"The year is ending on an uncomfortable note. The smell of fear is back in the air," said David Hufton at London-based broker PVM.

"The dam has collapsed and prices are in free fall with devastating consequences."

12.39pm GMT

This morning's rally in European markets has fizzled out, dragged down by energy firms and commodity producers.

All the main indices are now in the red, led by a 1% slide in Frankfurt:

12.22pm GMT

The Bank of England have uploaded Minouche Shafik's new speech on interest rate policy:

12.05pm GMT

Minouche Shafik, deputy governor of the Bank of England, has begun speaking at the Institute of Directors' HQ in London.

In deciding how to vote in monetary policy meetings each month, I look across a wide range of indicators. There are many signs that the economy is normalising - the labour market is tightening, consumption growth is solid, investment is recovering, and even productivity growth is showing tentative signs of a return. And although the downward pressure on inflation from movements in energy prices and the exchange rate are proving persistent, they will not have a permanent effect on inflation.

But, there is residual uncertainty about the relationship between the real economy and inflation - something economists refer to as 'model uncertainty' - which in this instance augurs for caution in setting monetary policy.

11.59am GMT

Yup, missed this one:

With everything else going on, few noticed silver's drop to a six-year low under $13.75/oz. pic.twitter.com/lsFQxL4yo9

11.48am GMT

Brent crude is also caught up in the oil selloff, hitting a new near-seven-year low today.

It's currently down 3% to $36.78, only half a dollar above the low hit in February 2009.

11.42am GMT

The turmoil in the junk bond market (see earlier) has apparently claimed another victim.

Bloomberg is reporting that Lucidus Capital Partners has liquidated its positions, and returning funds to clients.

"The fund has exited all investments," Chief Executive Officer Christon Burrows and Chief Investment Officer Geoffrey Sherry said in the statement obtained by Bloomberg.

"We would like to thank our investors and counterparties for their support over the years."

Lucidus Has Liquidated $900 Million Credit Funds, Plans to Shut: https://t.co/Q5lEN0QeuA

Another one bites the dust. Bberg reporting that Lucidus High Yield fund has liquidated and will close.

11.29am GMT

Oil is also suffering from the strengthening US dollar (which pushes down the cost of commodities priced in dollars).

Investors are anticipating receiving higher returns on US dollar holdings once the Fed raises borrowing costs.

Oil continues to plunge now at session lows, down USD 0.64 at USD 34.98, not being helped by the stronger USD seen this morning

11.21am GMT

The oil price has lurched through another milestone, as the selloff gathers pace.

US crude oil just traded hands at $34.99 per barrel, a new near-seven year low.

WTI drops below $35 for the first time since Feb 2009 pic.twitter.com/sEFPcpjXnR

11.13am GMT

Over in Bologna, European Central Bank president Mario Draghi is repeating his traditional call for eurozone governments to reform their economies and their monetary union.

In a well-worn refrain, Draghi is urging politicians to do more to tackle problems in the euro area, and pointed to the bad loans still sitting on some bank balance sheets.

Investment has been held back in the euro area by three things: weak demand dynamics, the still-high private debt overhang and fragile private sector confidence.

The euro area today needs to take additional steps, alongside supporting demand, to address the debt overhang and fragile confidence. Structural reforms are key to this end. It is clear that, in some countries, the large stock of non-performing loans (NPLs) is still preventing a stronger recovery in credit. All this explains why facilitating a work-out of NPLs has to be part of the package of policy actions to restore productive investment. The ongoing work towards a Capital Market Union (CMU) is an opportunity to accelerate progress also on this front.

More Open Mouth Operations from Mario Draghi of the #ECB https://t.co/SGmj0uzU9I

11.02am GMT

Thousands of oil workers at Royal Dutch Shell and BG face an uncertain Christmas.

These reductions are in addition to the previously announced plans to reduce Shell's headcount and contractor positions by 7,500 globally.

The proposed changes are subject to deal completion, engagement with affected employees and relevant employee representatives. Further detailed work will be undertaken on the details of the proposed operational and administrative restructuring as part of ongoing integration planning.

10.50am GMT

European stock markets are holding onto their early gains, while the oil price has hit a new seven-year low.

"Risk sentiment is rather good at the start of this year's last Fed-focus-week."

10.35am GMT

This chart shows how the selloff in junk bonds (or 'high-yield' assets) has already hurt investors this year.

Looks like this will be the first negative year for high yield outside of a recession https://t.co/WwMNSDNtUr pic.twitter.com/2vNUyg64k3

10.30am GMT

The head of Royal Bank of Scotland has predicted that UK interest rates will remain at their record lows for another year.

I think the interest rates in the U.K. will stay low for longer.....

I don't think they'll be moving in 2016. So we're building our business around the fact that they won't be moving.

10.09am GMT

This is encouraging.... Industrial production across the Eurozone jumped by 1.9% year-on-year in October, according to data just released.

Output was 0.6% higher compared with September, reversing a 0.3% decline, and suggesting that European firms saw stronger demand during October.

The increase of 1.9% in industrial production in the euro area in October 2015, compared with October 2014, is due to production of durable consumer goods rising by 4.2%, capital goods by 3.5%, intermediate goods by 1.5%, non-durable consumer goods by 0.7% and energy by 0.2%.

Euro area industrial production +0.6% in Oct 15 over Sept 15, +1.9% over Oct 14 #Eurostat https://t.co/JH8HPPwzBt pic.twitter.com/WOzdVj43on

10.00am GMT

Over in Greece, the government is launching a new push to get its austerity programme approved by MPs, to unlock more bailout funds.

The Athens parliament is expected to vote on various measures on Tuesday night, including unpopular privatisations and new rules to tackle bad debts.

The Greek prime minister, Alexis Tsipras, has warned of the perils that his government faces after jumping another reform-for-aid hurdle with international creditors.

After a week of rigorous negotiations with foreign lenders, Tsipras's leftist-led government finalised a deal foreseeing further privatisations, reforming the energy sector and opening up the market to non-performing loans. The agreement is slated to unlock another a1bn (720m) in loans for the debt-stricken country next week.

9.50am GMT

The cost of insuring South Africa's sovereign debt against default has also fallen this morning, following Pravin Gordhan's reappointment as finance minister.

The cost of a South African credit default swap (which would pay out if the country defaulted), has dropped from 347 basis points to 320 basis points this morning.

9.45am GMT

European currencies are losing ground against the US dollar this morning.

The pound has dropped by half a cent, to $1.516, while the euro has lost a third of a cent to $1.096.

"Currency markets are in retracement mode to start the trading week.

The Swiss Franc, Euro, British Pound and Japanese Yen are trading lower having outperformed on Friday while the Australian and Canadian Dollars are in recovery mode having been the weakest over the same period."

EM bounce largely confined to countries which did the Finance Minister Hokey-Cokey pic.twitter.com/7V3zJ4jHYE

9.37am GMT

Kit Juckes of French bank Socii(C)ti(C) Gi(C)ni(C)rale is also worried about the junk bond market.

He predicts pain as investors who have piled into riskier assets in the search for decent returns try to cash out, particularly from energy and commodity companies.

The news on Friday that Third Avenue Management is winding up its 'Focused Credit Fund' prompted plenty of parallels with the closure of mortgage-backed credit funds ahead of the financial crisis in 2008.

A decade ago, easy money was fuelling a surge in mortgage lending and it was investors in that market who took the hit as borrowers suffered from economic slowdown and higher rates. Part of the problem for US High Yield funds is that they have been forced down the credit curve in search of yield.

9.22am GMT

Some industry pros are looking nervously at the junk bond market, where the prospect of a US interest rate hike has already caused some ructions.

Junk bonds (company loans that are below investment grade) suffered a serious selloff on Friday, dropping by the most since 2011.

You're a Fed governor. Junk bond bubble now bursting has your zirp fingerprints on it. What are you going to do Wednesday? Stick or twist?

8.52am GMT

South Africa's currency, the rand, has surged overnight after the country got its third finance minister in a week.

The rand surged by 5% after respected politician Pravin Gordhan (a former finance minister) was appointed, in a remarkable U-turn by prime minister Jacob Zuma.

Let's put this #Rand "surge" into a bit of perspective #PravinGordhan pic.twitter.com/v9HrTv8WQg

"Critics would say having a finance minister serving only two days doesn't bode well for the reputation of South Africa.

"International investors are probably thinking: Why didn't the president make a much more considered decision in the first place?"

Rand cheers return of Pravin Gordhan https://t.co/MZTwfg2603 - result is brilliant, process an unmitigated disaster for SA cc @CitadelSA

8.36am GMT

London's FTSE 100 index of blue chip companies has climbed over the 6,000 market, as shares claw back some of last week's losses.

So the last full trading week of 2015 is underway and - at least for now - traders seem eager to try and put some of the recent malaise behind them.

What's more, the sheer volume of surplus cash that is in play may well ensure that corporate borrowing costs barely feel any fall-out as a result of the policy change, mitigating some of the real downside for corporate balance sheets.

8.22am GMT

The prospect of a US rate hike has already spooked investors in emerging markets.

Today's Asian selloff helped to send the MSCI Emerging Markets Index down to its lowest level since 2009.

Emerging stocks at six-year lows before Fed decision https://t.co/nLQPmatuwT pic.twitter.com/wJA39Wcl3A

8.11am GMT

Stephen King, senior economic adviser at HSBC, predicts that US interest rates are unlikely to rise much in 2016, even if the Fed hikes on Wednesday.

The Fed needs to tread very carefully because China, and other parts of the world, are not as robust as the US itself.

8.02am GMT

The oil price is dropping this morning, amid growing speculation that Iran will fuel the world's growing supply glut.

Brent crude has fallen by 0.6% in early trading to $37.69 per barrel, while US crude is down 0.5% at $35.43.

And #oil just keeps on sinking...as Iran says "no chance" will delay plan to boost shipments pic.twitter.com/cbT7DmL267

Iran is on track to ship 1.26 million barrels a day (bpd) of crude this month, according to an industry source with knowledge of the OPEC member's tanker loading schedule.

That preliminary number, nearly a quarter higher than levels just two months ago, could stoke worries over a global supply glut that have intensified since the Organization of the Petroleum Exporting Countries abandoned its output ceiling on Dec. 4.

7.49am GMT

Over in Asia, stock markets have endured a bumpy ride today as the prospect of a US rate hike on Wednesday night dents confidence.

Japan's Nikkei tumbled by 3% at one stage, closing down 1.8%, while 2% was wiped off Australia's S&P index.

China's decision to loosen its grip on the yuan and allow slow but steady depreciation in recent weeks has added to concerns that the world's second-biggest economy may be more fragile than expected.

The move, which followed an announcement on Friday of a shift towards a trade-weighted basis instead of exclusively tracking the US dollar, will also heighten concerns that China is prepared to intensify a currency war with rival regional economies in order to keep its huge export sector competitive.

7.27am GMT

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

With the US Federal Reserve likely to start its interest-rate hiking cycle next week, we reiterate our cautious view on emerging markets for the coming months.

Debt in emerging markets (EM) has risen significantly over the past ten years and EM currencies have weakened, heightening concerns about credit risk.

Our European opening calls: $FTSE 5955 up 2 $DAX 10351 up 11 $CAC 4555 up 6 $IBEX 9617 down 14 $MIB 20998 down 18

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