Market buzz: Stocks jump off lows ... led by defensives

1731: Interest rate sensitive stocks paced gains on the top flight index on Friday, with BT Group, United Utilities, Severn Trent, British America Tobacco and British Land at the top of the leaderboard. In the background, yields on longer-term Gilts were lower, tracking a fall in those for similarly-dated Treasuries on other side of the Atlantic. Triggering those moves was what some observers described as a less hawkish than expected monetary policy report to Congress from the Federal Reserve.

That pattern of gains in the more defensives areas of the market chimed well with traders' caution. On that note, strategists at Bof-ML pointed out to clients the recent inverse correlation between the US dollar and Treasury bond yields, a rarity which had only been observed less than 10% of the time over the past half century.

And when it had occurred, they said in the same research report, it had coincided with "bouts of inflation and/or market volatility [...] on average inflation rose 2 percentage points, equities fell 9% and volatility rose 22 percentage points; higher wages remains the obvious risk to investors; higher wages & peak profits/growth much less anticipated."

BofA-ML also reminded clients to mond the proverbial 'minefield' of risk events which markets were about to enter, including "Feb 28th Powell @ Humphrey-Hawkins, March 1st US ISM, March 4th Italian elections/Merkel coalition vote, March 8th ECB, March 9th BoJ & US payroll/wages, March 21st FOMC."

1730: In a nut shell, some market observers' initial reading of Fed chair Jerome Powell's semi-annual monetary policy report to Congress is that it does not clinch the case for four interest rate hikes in 2018, instead of three. Unsurprisingly, stocks are higher (for now). Significantly, New York Fed chief William Dudley is making the case for the central bank to stop shrinking its balance sheet when it is "somewhere" above $2.9trn, versus $4.5trn at present. Yields on US 10-year notes are down five basis points to 2.87%. That on the two-year note off two bp to 2.23%. VIX at 17.29, down 7.64%. KBW index higher by 0.7%.

1455: Fed chief Jerome Powell will testify to the House financial services committee on Tuesday, rather than the Wednesday that had been expected, the Wall Street Journal reports. See below on more detail on the Humphrey Hawkins testimony.

US stocks are on the up after the opening bell, with the Dow Jones up 130 points early doors, led by tech stocks Intel and IBM and oil major Exxon.

The White House plans to levy its "largest ever" sanctions package against North Korea, the WSJ was also reporting. President Donald Trump is set to announce sanctions targeting shipping and trading companies "as the US seeks to further cut off foreign-currency revenues keeping the nuclear-armed regime afloat".

1445: Recent news on the UK economy, including the downward revision to Q4 GDP growth, appears to have lent more support to the consensus forecast of slower growth in 2018, laments uber-hawkish Capital Economics, which has been predicting an acceleration. "But it’s too early to throw in the towel," writes economist Jonathan Loynes, chief economist at the boutique, backed up by senior UK economist Paul Hollingsworth.

"Not only was Q4’s slowdown at least partly down to temporary factors, but there are some more fundamental reasons to expect growth to pick up this year. We therefore stick to our forecast of growth of about 2% in 2018, allowing the MPC to withdraw its policy support a bit more quickly than financial markets currently anticipate."

1403: Bank of America-Merrill Lynch's Bull & Bear sentiment indicator was still at 8.2, on a scale of 0 to 10, indicating now was a time to 'sell' signal. It's a 'contrarian' indicator, with the underlying logic being that when 'everyone' is 'bullish' no one is left to buy, or the opposite. The components that make it up are: high-frequency positioning, credit market technicals, equity market breadth, equity flows, bond flows and long-only positioning. The first four components are at "very bullish" levels and the last at "bullish". Bond flows on the other hand are "very bearish".

"Recent 5 months of lower US dollar & higher US bond yields rare (<10% of past 50-year history, Table 1, though v common in Emerging Markets); has coincided with bouts of inflation and/or market volatility...on average inflation rose 2ppt, equities fell 9% and volatility rose 22ppt; higher wages remains the obvious risk to investors; higher wages & peak profits/growth much less anticipated," the strategists note.

As an aside, the Bull & Bear indicator moved into 'sell' territory just before the recent down-draft in US equities. Disclaimer (it is what it is): Past performance is no guarantee of future returns.

1321: Federal Reserve chair Jerome Powell's Humphrey Hawkins testimony scheduled for 15:00 GMT (the text, not the speech). San Francisco Fed president John Williams due to speak shortly before 2100 GMT, preceded by New York Fed chief William Dudley and Eric Rosengren who are reportedly due to take part in a conference towards 1515 GMT. Cleveland Fed's Loretta Mester and Kansas City Fed's Esther George also expected to take part at same event.

1309: There's read-across for SIG in this morning's announcement from Kingspan, say analysts at Shore Capital.

Kingspan reported that demand for UK insulated panels, primarily used in low rise commercial buildings, has fallen by 15% in 2018 so far. "We estimate around 12% of SIG group sales comprise insulated products to the UK commercial construction market and therefore it is unlikely near term trading at SIG willnot be affected," the analysts said, retain their 'hold' recommendation and adding that they "eagerly await" full year results on 9 March.

1209: Stocks in London are still wallowing slightly below the waterline, with the FTSE 100 down almost 17 points or 0.23% at 7,235.51 as the pound is up against the dollar and euro. Cable is up 0.3% at $1.3993, while the single currency is down 0.5% at €1.1375.

The London midday market report has BT at the top of the pile, with RBS one of the main weights, with all banks in the red as they tracked overnight losses in US banks as recent gains in longer term Treasury yields retreated from recent four-year highs.

Joshua Mahony, market analyst at IG, said: "RBS has seen a sharp decline at the open today, with the announcement of the first profit in a decade doing little to boost investor confidence. While the £752m profit stood in stark contrast to the £6.95bn loss last year, markets are wary of the impending DoJ fine which could easily overshadow today’s profits. Coming off the back of positive earnings from Lloyds, there is a clear benefits of being free from any government stake, which will continue to loom over RBS until the stake is finally sold."

1207: There's a robot in your future. BoE's David Ramsden sounds positive (but guarded) note on outlook for productivity growth.

- Productivity growth picked up during the second half of 2017, but due to the recent volatility from one quarter to the next, " we'll have to wait and see whether the pickup is sustained in the near-term."

- Results of Bank's decision maker panel "suggest" Brexit uncertainty will hold back business investment growth less in 2018 than in 2017.

- Density of industrial robots in UK is one of the lowest in OECD, which means scope for productivity gains.

- MPC sees productivity growth at just over 1% per year over next 3 years, which is around half the pre-crisis rate.

- But lower inward migration and demographic effects will offset some of the benefits from that improvement.

- Low productivity growth means UK economy's speed limit is around 1.5% - anything above that suffices to generate excess demand.

- Ahead of February MPC meeting, BoE revised down its estimate of spare capacity within firms, not of the underlying rate of productivity growth.

1059: After advising clients buy the market dip two weeks ago after what it saw as a technical correction, JP Morgan today looks at "what might the market do next".

First, JPM note that the hedge funds have gone from a near-record-high equity beta, to a near-record-low equity beta during the market sell-off, largely via buying of downside options and selling of index products. "This move started to revert last week, but has plenty of room to increase", analysts write. "In terms of systematic selling, this is largely over. In fact our models show that volatility targeting strategies may now start very slowly rebuilding their equity positions."

Also noting that most pension funds rebalanced at the end of January and global markets are now around 5% lower from that point, with next week being month-end when buying from fixed weight allocators "could be substantial" and so these flows "will be a headwind for any near-term bearish thesis".

Having heard theories that the market ‘needs to re-test’ the bottom quickly, the analysts said that "seems to be a somewhat arbitrary argument with no significant structural or statistical evidence to support it", while a thesis is based on fear of rapidly rising yields and inflation are is "overblown near term" but is "more difficult to disprove".

With speculators having now amassed the largest short position in the history of bond futures trading, "there is always risk of profit taking, or worse a proper short-squeeze".

0920: BT is up as telecoms regulator Ofcom eased price controls on its infrastructure subsidiary Openreach.

Analyst Michael Hewson at CMC Markets noted: "Ofcom moderated its approach on the price controls on the company’s Openreach division for access to the fibre broadband network. The original proposal mooted a charge of £11.23, but this has changed to £11.92 a potential net improvement of £80m over four years."

Ofcom also said upfront cost of building ultrafast, full-fibre broadband networks would halve under its new measures, which include forcing faster repairs and installations by Openreach and BT making its telegraph poles and underground tunnels open to rival providers, making it quicker and easier for them to build their own full-fibre networks directly to households around the UK. "This measure, which is already being used by providers such as Virgin Media and CityFibre, will fundamentally change the business case for building new networks."

0850: Carllion's financial adviser Lazard and its joint brokers Morgan Stanley and Stifel have been drawn into the Commons joint select committee investigation into the collapse of Carillion, the Times reports this morning, after it emerged that there could have been a false market in the shares for at least six weeks before the construction company’s blockbuster profit warning last summer.

An auditor from KPMG told MPs at the hearing yesterday that Carillion directors knew the company would have to take writedowns on its construction contract for the Qatar World Cup as early as last May, around two months before the company announced a £845m hit from Qatar and other contracts that set off the chain of events that led to the company going into compulsory liquidation in January.

Committee chair Rachel Reeves said: “KPMG’s evidence that they were aware from May 2017 that Carillion were to set aside a contract provision raises serious questions of whether Carillion directors may have created a false market in its shares before finally coming clean with its announcement to investors in July 2017,” she said, adding that she will seek an explanation from the trio of City firms.

0839: Looking some other corporate newsflow, William Hill is in the red despite an operating profit in line with guidance as online continues its good progress with double digit growth.

Phoenix Group is up 7% after agreeing to buy Standard Life Aberdeen's insurance arm for £2.9bn and extended its long term partnership with the recently merged group to provide asset management.

BAE Systems is in the red again after its results yesterday, even though chief executive Charles Woodburn raised hopes of fresh orders for Typhoon fighter jets from Saudi Arabia, saying prospects for new orders were “as good as I have seen in the last two years and possibly as good as they have been in quite some time”. He added that landing "one, two or three" of orders that were "out there" would put the programme back into growth mode over the next decade.

0820: The FTSE 100 has opened down 15 points or 0.2% at 7,236.94, with RBS a notable laggard.

The taxpayer owned bank is down 3.9% despite reporting the first profit in a decade. There were some slight misses versus consensus in its 2017 numbers and RBS unveiled increased restructuring costs for 2018 to "accelerate the transformation of the bank" plus there are some large looming regulatory settlements this year.

IAG is also down after its results, while Pearson and Standard Life are among the top risers.

0703: European stock markets are expected to open modestly higher after Wall Street rallied modestly before giving up a good chunk of those gains heading into the close and with Asia swathed in green this morning.

"It’s been slightly different this week with a disappointing performance across the board, with some fairly strong moves in both directions, as investors search for direction after last week’s decent rebound," says Michael Hewson at CMC Markets after European markets had a disappointing session yesterday.

"That we haven’t seen any sort of follow through from last week’s gains should be a bit of a worry and probably speaks to a wider concern that the current down move in stocks may not be quite over. Investors appear to be wrestling on the horns of a dilemma in the wake of this weeks Fed minutes which suggested that the prospect of four Fed rate rises this year might not be outside the realms of possibility, despite FOMC member and St. Louis Fed President James Bullard’s warnings about being too aggressive on the hiking cycle yesterday.

"Will the prospect of rising interest rates and more importantly a move beyond the 3% level and the 2013 highs on the US 10 year mark a shift in sentiment, as concerns that rising wages and prices, may start to eat into company profit margins, and prompt a more critical eye on which companies can absorb higher costs and those that can’t.

"Yesterday’s decline in US yields from a four year high of 2.95% may help explain why US markets were able to rally yesterday, and pull the US dollar lower, but the inability of US stocks to close anywhere near the highs of the day only serves to highlight the lack of conviction buyers in the market, as well as some significant indecision, quite a contrast to the complacency of January."