Daily Fundamental

Morning Call – Global investors are starting to doubt..

Global investors are starting to doubt whether the recent stock rally can continue. European stock markets are called to open lower on Friday, with Wall Street futures lower as well. Government bond prices are seen starting higher. The euro is little changed, with spot gold and oil lower.

European stock markets are likely to fall on Friday as investors cautiously take some profit from the week’s gains.

Standard & Poor’s warned that the easing steps taken by the U.S. Federal Reserve and the Bank of England would be more difficult to replicate across the euro zone, where it said there’s a growing risk of deflation.

“While Germany, France, or even Italy seem immune to a deflationary spiral, the same cannot be said of Ireland or Spain, where the recession is likely to drag on for a longer period of time,” said Jean-Michel Six, S&P’s chief economist for Europe.

The European Central Bank would find quantitative easing measures more difficult to implement than in the U.K. because there is no single bond market in the euro zone, but instead a collection of national bond markets denominated in euros.

Analysts said some of the initial euphoria over the news that the Federal Reserve would buy longer-dated U.S. Treasurys has faded.

“Traders are left wondering whether these steps are being taken because the Fed fears the ongoing slowdown could be even worse than currently expected – and they are getting their retaliation in first,” said IG Index Chief Market Strategist David Jones.

“There is definitely a feeling around stock markets at the moment that the recent momentum has waned and we are back into wait-and-see mode.”

U.S. stock futures are lower on Friday, after markets fell Thursday as such banks as Citigroup gave back some of the week’s gains and traders digested the Federal Reserve’s latest easing gambit.

A Fed-inspired surge in oil prices helped such drillers as Devon Energy and hurt airlines, including American Airlines parent AMR.

Stocks sold off because “energy, foods, and other commodities just got more expensive for businesses that use them in their production,” said Frank Beck, chief investment officer for Capital Financial Group in Austin, Texas. “That combined with recent gains, which give a lot of short-term investors an itchy trigger finger.”

On Friday, Asian shares were mostly lower heading into the weekend, with a pullback on Wall Street crimping financial stocks but soaring metal prices underpinning commodity plays around the region.

Oil shares took the spotlight, defying broad weakness in regional markets, and buoyed by a rally in the front-month futures contract to a nearly four-month high.

“What is happening is that the traders still see the [oil] market as oversold, and while U.S. inventories did climb a little [as reported Wednesday], they do not see any big surpluses overhanging the market,” said Charles Perry, president of Perry Management, an energy-consulting firm.

The euro is little changed against the dollar and yen on Friday, but observers say the greenback could resume sliding soon.

The dollar found some support overnight as U.S. stocks fell on renewed concerns about the U.S. financial services industry, fueling demand for the currency as a relative safe haven. However, analysts expect the U.S. Federal Reserve’s quantitative easing measures, announced earlier this week, to continue weighing on the dollar.

“Debasement concerns may continue to plague the dollar given deteriorating rate differentials, and especially if risk appetite manages to chart a steady course,” said Emmanuel Ng, an economist with OCBC Bank. “Near term…weakness towards the greenback may remain very much a momentum play.”

The euro should remain especially well-supported at this moment, Ng added, but its performance will be heavily influenced by any hint of euro-zone monetary policy changes ahead of the European Central Bank’s April 2 meeting.

Marc Chandler, a currency strategist with Brown Brothers Harriman, said the Fed’s measures, while dollar-negative in the short term, may support the currency in the longer term.

“We continue to believe that the aggressiveness of the U.S. policy response…will be rewarded with an earlier recovery than in Europe and Japan,” he said.

In the meantime, Chandler said, the euro may rise to around $1.40 this month and the yen’s rally against the dollar should be capped around Y94 for now, given that Japan’s central bank is also implementing quantitative easing measures.

European government bonds may start higher on Friday in line with increased demand for Treasurys after the Federal Reserve’s shift towards a quantitative easing policy.

“Long-end futures are likely to continue their recent advance with short-end futures probably encountering resistance though,” according to Axel Rudolph, Dow Jones Newswires technician. Investors will look at German PPI numbers for clues about the likelihood of the European Central Bank easing policy further to avoid deflation.

Bank of England Chief Economist Spencer Dale said Thursday that he expected a substantial amount of the contraction in the U.K. economy would be over by the end of the first half of this year.

Treasury prices are little changed on Friday as investors wait to see whether stock markets keep retreating.

U.S. markets fell Thursday on some profit-taking after the explosive run up on Wednesday.

“We may be close to being done with the rally,” said Jeffrey Given, portfolio manager at MFC Global Investments.

“Everything else was helping on the margin, but it wasn’t enough to spur growth,” Given said, referring to the Fed’s latest move to prop up the U.S. economy.

“The market appears to be realizing the severity of the situation, but has not yet fully priced it,” said T.J. Marta, strategist and founder of research firm Marta on the Markets.

“The realization that any economic recovery will derive solely from persistent governmental fiscal and monetary stimulus is gaining ground, but the situation remains more dire than is generally appreciated.”

Oil prices are lower Friday but stayed around $51 a barrel after a dramatic U.S. central bank move to infuse $1 trillion into the financial system.

New York’s main futures contract, light sweet crude for delivery in April, fell 61 cents to $51.00 a barrel after climbing $3.47 in US trade yesterday. The contract topped $50 for the first time in four months and at one point yesterday surged to $52.25 – the highest level since Nov. 28. Brent North Sea crude for May delivery was off 41 cents to $50.26 after rising $3.01 in London.

“Slowing demand and rising supply might not matter as the Fed prints trillions of dollars to buy back treasury securities and create an artificially lower yield driving down the value of the dollar and driving up the price in cheaper-dollar oil,” said Phil Flynn of US-based Alaron Trading.

Spot gold slipped after rallying more than $30 overnight, falling $7.30 to $951.70 a troy ounce.

Concerns that aggressive quantitative easing in the U.S. would spur inflation were still supporting the metal, said HSBC analyst James Steel. Gold is often used a hedge against inflation.

Still, “it’s by no means clear whether the proposed Fed actions will lead to higher inflation,” Steel added.

London Metal Exchange copper and aluminum fell back in Asia as well, amid questions about whether recent Chinese buying reflects the beginning of a sustainable recovery in demand or is mostly driven by stockpiling and price arbitrage with metals on the Shanghai Futures Exchange. LME three-month copper was at $3,970 a metric ton, down $18 from the London kerb, with aluminum at $1,451, down $11.

By One Financial

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