Indices UpdateEuropean and US equities pushed higher yesterday supported to a great extent by the rally in oil. Brent crude hit a twelve month high as investors shrugged off Friday’s weaker Non-Farm Payroll number and responded to bullish news from the World Energy Congress in Istanbul. Russian President Vladimir Putin said he hoped that OPEC members would follow up on the cartel’s commitment to cut production at next month’s meeting. He went on to say that Russia was ready to join OPEC with any moves to support the oil price.
There was little market reaction to the second presidential debate. Donald Trump was already in trouble after being caught on camera making objectionable remarks back in the 1990s. However, many commentators felt that he handled the debate fairly well. He managed to keep his cool while landing a few punches on Hillary Clinton concerning her missing emails and her husband’s behaviour while in office. However, there’s a feeling on Wall Street that The Donald has blown it and that the Democrats will run things for another four years. This may not be incredibly market-positive, but it should mean less volatility than a Trump win.
Equities drifted lower on Friday following the release of a disappointing set of US Non-Farm Payroll data. September payrolls came in at 156,000 which were below the 171,000 expected. However, this was offset to some extent by an upward revision to August’s data to 167,000 from 151,000. The Unemployment Rate ticked up to 5.0% from 4.9% and this also weighed on investor confidence. But Average Hourly Earnings picked up a touch and overall the data wasn’t weak enough to discount the possibility of a rate rise in December.
Deutsche Bank (DBK) continues to be a focus for investors. It fell over 3% in early trade yesterday as there was disappointment that a deal hasn’t yet been reached between the bank and the US Department of Justice (DOJ). The DOJ has proposed a fine of $14 billion for Deutsche’s involvement in the residential mortgage-backed securities ahead of the financial crisis. At the end of last week there were rumours that the final settlement would end up nearer $5 billion. However, shares in the troubled German bank rallied later in the session, despite no further updates.
The FTSE 100 ended the day 53.1 points higher at 7,097.5
The German DAX rose 133.2 points or 1.3% to end the day at 10,624.1
The US30 closed 88.6 points higher to finish at 18,329 The S&P 500 ended up 0.5 % at 2,163.7 while the Nasdaq 100 rose 0.6% to close at 4,893.8
EquitiesWilliam Hill (WMH) rose yesterday on news that it was in merger talks with Canada’s Amaya. This is being talked about as yet another “merger of equals” with the proposed £4.5 billion tie-up between the UK bookmaker and the owner of online gaming sites PokerStars and Full Tilt expected to lead to annual savings of £100 million. The idea behind the merger is to create an international giant covering sports betting, poker and the online casino business. Back in the summer Rank and 888 Holdings abandoned a £3 billion merger with William Hill. Shares in the UK bookie ended the day 2.8% higher at 302.8 pence.
Commodities UpdateCrude was weaker in early trade yesterday. However, it then rallied sharply in a move which helped to keep a bid under global equity prices. WTI closed in on its highs from early June around $51.60. Meanwhile Brent popped above its own June high to hit its best level in twelve months. The rally came as many of the world’s major producers gathered at the World Energy Congress in Istanbul. Russian President Vladimir Putin said his country supported OPEC’s decision to take action to boost oil prices. He hoped that the cartel would be able to agree to limit production when it meets late in November. He also said that Russia was willing to consider a freeze if not an outright production cut. Russia is currently the world’s largest energy exporter and is on course to pump a post-Soviet record amount of oil this month. On top of this, Saudi Arabia is launching a bond deal tomorrow. Higher oil prices certainly benefit the Kingdom generally, but will be particularly handy to help get the bond issue away smoothly.
Crude oil lost ground at the end of last week. The sell-off followed the release of a disappointing Non-Farm Payroll report which suggested that the US economy may not be strong enough to deal with a Fed rate hike ahead of the year-end. In addition, investors were increasingly questioning the ability of OPEC members to reach agreement over the details of the output cut proposed in Algeria the other week. Talk of a cut in production took market observers by surprise as most didn’t believe that even a freeze was possible. However, there are still many unanswered questions such as which countries will be forced to cut, and how will OPEC ensure compliance.
Gold and silver rallied sharply in early European trade yesterday. However, both metals pulled back from their best levels later in the session. Looking at the chart of gold it’s possible that some support is building in the band between $1,240 and $1,250. It could be that this becomes a base for a pick-up in prices following last week’s shock sell-off. If so, then it looks as if $1,300 will act as resistance. This is the key level as far as any upside is concerned. Traders will want to see gold break and hold above here for confidence to build for a more significant push higher. However, gold will first have to break above $1,280 which is roughly where its 200-day moving average comes in. As far as silver is concerned, it now needs to hold above $17.40 to have any chance of heading back towards $18 in the short-term.
Yesterday it felt as if investors were trying hard to push the two precious metals higher. However, the upside was capped thanks to a bounce in the US dollar. On Friday the Dollar Index hit its highest level in close to three months. But it pulled back sharply in the immediate aftermath of the payroll release. Yesterday investors were heading back into the dollar and this helped to take the shine off precious metals.
Forex UpdateThe US dollar made gains against most of the majors yesterday. The only exception was with the Canadian dollar as the “Loonie” rallied sharply on the back of higher oil prices. Investors piled back into the greenback after last week’s sell-off on the back of weak payroll data. The disappointing Non-Farm Payrolls led investors to downgrade their expectations of a Fed rate hike before the year-end. However, sentiment improved over the weekend and it appears it will take more than a single weak employment number to convince market participants that the US economy isn’t robust enough to handle a modest amount of monetary tightening.
Investors remain nervous about the outlook for sterling. There was a sterling “flash crash” during Friday’s Asian Pacific session which saw cable lose around 8% of its value in minutes. The GBPUSD was trading around 1.2600 at midnight but then all bids disappeared. FX is not exchange-traded so it is difficult to establish a precise low. But some brokers report the GBPUSD falling below 1.1600. Sterling then bounced back as quickly as it fell although cable then settled in around 1.2400 – roughly 2 cents below its trading level prior to the crash. But it has been unable to make back any more of its losses. It ended lower again on Monday and fell below 1.2300 this morning.
It’s still unclear what triggered the crash, although the lack of liquidity in Asian Pacific forex will have played a part. But whether this was a “fat finger” erroneous order, a large algorithmic trade that went wrong, an unfortunate options play or something else will probably never be known. But what is apparent is that sterling is out of favour with investors and has been ever since the UK voted to leave the EU. One reason is that the Bank of England (BoE) felt it necessary to cut its headline Bank Rate and restart quantitative easing in August. The BoE also made it clear that they are ready to loosen monetary policy further before the year-end. But sterling also came under pressure after UK Prime Minister Theresa May announced that she would trigger Article 50 before the end of March 2017. Mrs May also indicated that she was ready to put control over migration above access to the single market. The concern is that this will lead to an exodus of banks and other financial institutions from the UK which will lead to falling tax receipts and a further widening of the budget deficit. Chancellor Philip Hammond also told the Tory party conference that leaving the EU was a big threat to the UK’s economy. He now looks set to use Brexit as an excuse to boost infrastructure spending, abandoning his predecessor George Osborne’s plan to eliminate the country’s persistent budget deficit by 2020. Mr Hammond will deliver his Autumn Statement next month.
Upcoming eventsToday’s significant economic releases include German and Euro zone ZEW Economic Sentiment surveys. Bank of England MPC member Michael Saunders testifies before the Treasury Select Committee.
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