Indices UpdateEuropean equities and US stock index futures were lower in this morning’s early trade. The major indices all pulled back from their best levels after a buying splurge triggered by a dovish speech on Tuesday from the head of the US Federal Reserve. The dollar steadied at lower levels while both WTI and Brent crude fell back and held below $40 per barrel. Precious metals were also steadier with a slight upside bias. Equity markets surged higher yesterday. Investors readjusted their risk exposure in the light of fresh Federal Reserve dovishness. In an address to The Economic Club of New York, US Fed Chairman Janet Yellen noted that economic readings were mixed and so it was appropriate to proceed cautiously in adjusting policy. She also highlighted risks to the economic outlook from global developments, with particular emphasis on China. A number of regional Federal Reserve Bank presidents gave speeches last week suggesting that another rate rise could come as soon as April. So it was something of a surprise that Mrs Yellen was relatively downbeat in her overall economic assessment, and correspondingly dovish. But although this all suggests a split within the Fed which could leave Mrs Yellen in a minority, that is neither here nor there. The FOMC is undemocratic in that its members tend to group around their leader. Consequently, much more attention is now being paid to Janet Yellen’s comments, which, unsurprisingly, more accurately reflect the statement from the March meeting. However, the minutes of that meeting (due for release next Wednesday) may prove revealing. Both the Dow Jones Industrial Average and S&P500 hit their highest levels since the end of last year. The rally finally meant that both indices were slightly ahead for the first time in the first quarter, although there’s still a day to go. The FTSE 100 index closed at 6,203.2 up 97.3 points on the day, or 1.6% The German DAX rose 158.7 points or 1.6% to finish at 10.046.6 The US30 closed up 83.6 points to finish at 17,716.7 The S&P 500 rose 0.4% to close at 2,064 while the Nasdaq 100 rallied 0.5% to close at 4,490.9
Equities UpdateThe FTSE100 soared higher yesterday and this time mining companies filled four of the top five slots of the index’s “gainers” list. Yesterday’s snap-back in the miners more than compensated for the sell-off on Tuesday. Anglo American (AAL) surged 11.9% to end the day at 536.2 pence. Rio Tinto (RIO) closed at 1,973 pence up 5.9%. BHP Billiton (BLT) tacked on 5.8% to finish at 793.6 pence while Antofagasta (ANTO) jumped 3.5% to end at 469.7 pence.
Commodities UpdateCrude fell sharply last night and has been unable to hold on to its post-Yellen gains. This is despite lower-than-expected US inventories. On Tuesday crude oil had been declining steadily ahead of Federal Reserve Chairman Janet Yellen’s speech to the Economic Club of New York. Front-month WTI briefly tested support at $38 - a level which is significant as it acted as resistance in December last year and earlier this month. This marked a pull-back of around 10% in less than two weeks for the contract. Traders were busy taking profits on long positions as they began to worry just how bullish next month’s OPEC/non-OPEC production freeze meeting may ultimately prove to be. Brent has also pulled back since mid-March. On Tuesday it had broken back below $40 per barrel and also looked as if was heading back towards the $38 area. Both contracts rallied as soon as Mrs Yellen’s speech came out of embargo. As noted previously, her comments were considerably more dovish than expected. This led to a sharp sell-off in the US dollar which helped to lift oil off its lows. In addition, the Fed Chair made specific reference to the oil price, warning about another fall in prices. To quote in full:“A second concern relates to the prospects for commodity prices, particularly oil. For the United States, low oil prices, on net, likely will boost spending and economic activity over the next few years because we are still a major oil importer. But the apparent negative reaction of financial markets to recent declines in oil prices may in part reflect market concern that the price of oil was nearing a financial tipping point for some countries and energy firms. In the case of countries reliant on oil exports, the result might be a sharp cutback in government spending; for energy-related firms, it could entail significant financial strains and increased layoffs. In the event oil prices were to fall again, either development could have adverse spill over effects to the rest of the global economy.” Gold and silver both flew higher as soon as the contents of Janet Yellen’s speech were released yesterday. This move coincided with a sharp sell-off in the US dollar. As noted earlier, Mrs Yellen was considerably more dovish in her outlook than any of her Fed colleagues who spoke last week. This led many analysts to push back their expectations for the next Fed rate hike. Some had been pencilling in a raise for April. But now the chances are that the Fed may even hold off from moving in June, and the odds are shortening on a September hike. Both precious metals slumped yesterday. The reason given by some analysts was that investors were becoming less risk averse and so more ready to put funds to work in equities. This may be true. However, they could soon be regretting their move if Janet Yellen’s concerns over the global outlook prove to be well placed. I’m not suggesting she’s a great forecaster or sage, but one of her reasons for delaying a rate rise was because she’s worried about the global economic outlook. If her fears materialise then there could be a time when it’s safer to be in gold than equities.
Forex UpdateThe US dollar continued to slide yesterday as investors repositioned themselves in the aftermath of a speech from the Federal Reserve chairman Janet Yellen. The EURUSD hit its highest level against the euro since 11th February after Mrs Yellen pushed out expectations for the central bank's next interest rate hike. There is now growing speculation that the Federal Reserve will hold off from further tightening until September. Before Janet Yellen’s speech, June had been the preferred date for another rate hike. However, April was also considered a possibility following some very hawkish speeches from four regional Federal Reserve Bank presidents last week. But the bottom line is that Janet Yellen is the most important voice at the Federal Reserve and opinions will tend to coalesce around her viewpoint. It is understandable therefore that Tuesday’s speech was in line with the FOMC statement, summary of economic projections and Mrs Yellen’s press conference from earlier this month.
Upcoming eventsToday’s significant economic events include the UK Current Account, Final GDP, Net Lending to Individuals, M4 Money Supply, Mortgage Approvals and Euro zone CPI. From the US we have Weekly Jobless Claims and the Chicago PMI. Federal Reserve Bank of New York President William Dudley will deliver a speech titled "The Role of the Federal Reserve - Lessons from the Financial Crisis."
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