European shares set for worst week since Sept after commodity rout

European shares were set for their biggest weekly fall since September on Friday after commodity prices tumbled to multi-year lows on worries over slower global growth and a glut in supply.

The FTSEurofirst 300 fell 0.4 per cent, down 2.3 percent for the week and set for its biggest weekly loss in ten.

Basic resources stocks remained down 4.8 per cent this week, despite bouncing 1.2 per cent on Friday. Energy shares were down 3.8 per cent for the week.

“The markets are alarmed that there have been further sharp falls in commodity prices,’’ Russ Mould, investment director at AJ Bell, said in a note.

“There is increasing evidence that global growth is slowing and investor confidence has been hit as a result.’’

Commodity prices

Commodity prices showed some signs of stabilisation, although they remained near multi-year lows.

Oil prices edged away from two-month lows on Friday, having tumbled to near 6 1/2-year lows this week, levels last seen in August after concerns over Chinese growth rocked markets.

US crude futures touched a 2-1/2 month low of $41.38 per barrel on a persistent rise in US stockpiles, and were poised for a 5.5 per cent decline for the week.

Copper, often seen as a good gauge of the world’s economic health because of its extensive industrial use, touched a six-year low of $4,787.50 per tonne, below its August trough. It was set for a 3.8 per cent loss for the week.

James Butterfill, Head of Research & Investment Strategy at ETF Securities, said he expected supply of copper to tighten as mining firms cut back on capital expenditure.

“We expect miners to continue to cut capex, which raises concerns over their longer term profitability,’’ he said.

“That’s why we think we’re nearing the floor in copper... as the cuts in capex will lead to a constriction on supply. Markets have also priced in a big contraction in Chinese consumption, which the data is not supporting.’’

Gold edged back up to $1,083.66 from a six-year low of $1,074.26 per ounce.

The drop in European stocks followed on from falls in Asia, while US Federal Reserve officials kept drumming up the case for a rate hike next month.

Asia-Pacific shares

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1.4 per cent, led by losses in resource shares. It was down 3.2 per cent for the week.

Japan’s Nikkei closed down 0.5 per cent, snapping a seven-day winning streak, but was up 1.7 per cent for the week.

The Shanghai Composite index slipped 1.4 per cent, with MSCI’s ACWI, the index compiler’s broadest gauge of world shares covering 46 markets fell to its lowest level in a month, having slipped 3.3 per cent from its 2 1/2-month high touched on November 4.

US rate hike

Various Fed officials on Thursday lined up behind a likely December interest rate hike.

Stanley Fischer, the Fed’s second-in-command, said US inflation should rebound next year, noting that the central bank could move next month to raise interest rates.

New York Fed President William Dudley said the risk of waiting too long was now roughly in balance with the risk of moving too soon to normalise rates.

None of these factors, however, significantly moved interest rate futures, which are still pricing in a roughly 70 per cent chance of a rate hike in December, pointing to investor concerns about potential downside risks to the world economy.

US retail sales

US retail sales, due later on Friday, will be closely monitored for further clues about the likely timing of a US rate hike.

Expectations that the Federal Reserve may hike rates, with the European Central Bank expected to ease policy further in December, has pushed the two-year US-German yield gap to its widest in 9 years and the 5-year spread to its widest since 1999.

Dollar vs other currencies

The dollar index, which tracks the US currency against a basket of six of its major peers, has edged back from Tuesday's seven-month high of 99.50 to last trade at 98.904, slightly higher for the day.

The dollar edged up 0.1 per cent to 122.74 yen, off Monday’s 2 1/2-month peak of 123.60, as risk appetite receded.

The euro slipped 0.6 per cent to $1.0755, remaining under pressure after European Central Bank chief Mario Draghi singled out the currency’s more robust performance since May as one driver for a “weakening’’ outlook on inflation on Thursday.

However, the euro looked set to end the week in positive territory, its loss on the day leaving it well above $1.0700 and stymying those who had expected the greenback to surge again after very strong jobs data a week ago.

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