European equities rose sharply on Tuesday as risk sentiment returned in early European session. A firmer yuan and gains in China’s main indices helped restore some confidence in the markets. The US dollar reversed earlier losses to head higher and oil prices attempted to make the first daily gain in 2016.
Comments by several central bank officials appeared to have little impact as market attention was focused on developments in China and in crude oil prices. On Monday, Dallas Fed President Robert Kaplan, who is not a voting member, said that the situation in China could force the Fed to delay further rate hikes.
ECB officials were also busy today with remarks on monetary policy but did not add anything new. Speaking to Reuters, Governing Council member Vitas Vasiliauskas said the ECB’s policy is effective and the central bank’s focus should be core inflation. Earlier in the day, another Governing Council member, Francois Villeroy de Galhau said the ECB’s QE program should boost growth and inflation in 2016 but expressed concerned about how low interest rates can go.
The euro had risen to 1.0899 dollars early in European trading but briefly hit a low of 1.0832 dollars on increased risk appetite before recovering to 1.0844 by late session.
The dollar came just shy of 118 yen before retreating to 117.81 yen in late European session. There was muted reaction to comments by the Bank of Japan’s Governor, Haruhiko Kuroda, who remains optimistic that underlying inflation trends have been steadily improving due to favourable employment conditions in Japan.
The pound had another bad session as disappointing industrial production data weighed on the British currency. Industrial output fell by 0.7% month-on-month in November against expectations of no change. Manufacturing output was also weaker, declining by 0.4% for a second straight month and compares with expectations of a 0.1% increase. The pound slumped to a 5½-low of 1.4378 dollars after the data, while the euro edged up to 0.7533 pounds.
Crude oil prices bounced higher in European trading after hitting a fresh 12-year low earlier in the day. US crude futures climbed by over 2% at one point to hit a high of $32.17 a barrel but prices were back down at $30.93 a barrel in late session. The outlook for oil prices is likely to remain bearish with OPEC still refusing to cut production following last week’s heavy losses.
The temporary rebound also lifted commodity-linked currencies, with the Canadian dollar moving away from near 13-year lows before it reversed again to drop to CA$ 1.4262 per US dollar. The Australian dollar also firmed on improved risk appetite, climbing to above 0.70 against the greenback, but fell back down to 0.6985 in late European trading.
The only major data out of the US today was the JOLTS job openings for November, which rose to 5.43 million from 5.35 million in October.
Looking ahead to tomorrow, markets will be anticipating the latest trade data out of China for any indication of a stabilization in the country’s economic slowdown. Exports are forecast to have fallen by 8% year-on-year on in December and imports are expected to decline by 11.5%.
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