• Trump surge morphs into Christmas rally – AM Briefing

    Early moves

    - Fresh record highs on Wall Street - But mixed start for European equities European stock indices have had a mixed start this morning. This is despite the US majors posting a clutch of fresh record closes last night. Yesterday the ECB managed to suggest that a tapering in its bond purchase programme was in the offing despite increasing monetary stimulus by slightly more than expected. Mario Draghi also made it clear that further stimulus could be forthcoming if inflation and growth showed signs of faltering in the future. There was a positive market reaction to this (and a sell-off in the euro) as the ECB President also emphasised that risks to Euro zone growth were still tilted to the downside. Meanwhile the post-Trump surge from early November is now turning into a pre-holiday rally. The major US indices really look overbought at current levels and many analysts are warning that a correction is long-overdue. But there’s no doubt that short-sellers have had a torrid time of late as even the shallowest of sell-offs has been met with a barrage of buying. But what happens to bond yields is key now. A 25 basis point rate hike next week from the Fed is completely priced in. But what is uncertain is the outlook for future monetary tightening.  If the FOMC’s “dot plot” is as hawkish as it was this time last year when it indicated four rate hikes in 2016, then we can expect a jump in yields and sharp downward correction in equities.

    Stock Index Update

    - Equities continue their “post-Trump” rally towards Christmas - No sign of profit-taking as yet Stock index traders were initially wrong-footed yesterday as they sought to come up with the “correct” response to the European Central Bank’s (ECB) announcement over future stimulus. Equities sold off as the headline showed that although the ECB was extending its quantitative easing programme from March 2017 to December 2017 (three months longer than anticipated), it was set to reduce its monthly bond purchases to €60 billion from €80 billion. In overall terms the ECB will be providing slightly more stimulus than was generally predicted. Yet many analysts were quick to brand the ECB’s move as market-negative. A number pointed out that psychologically, by cutting the monthly bond purchases to €60 billion from €80 billion, the ECB is signalling a taper. Nevertheless, investors have chosen to ignore this. Instead they focused on the Governing Council’s assurance that it stands ready to add to its programme in terms of size and/or duration should “the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation.” Now it’s worth remembering that this is nothing new as a programme extension has always been available to the ECB. In fact, the central bank has extended the duration of its programme twice before yesterday. However, ECB President Draghi also emphasised that risks to Euro zone growth were still tilted to the downside, so raising the prospect of further monetary accommodation.

    Commodities Update

    - Crude finds support - Weaker dollar lifts gold Crude oil steadied yesterday after three days of losses. Technically, there was nothing notable about the trade in Brent. However, WTI has managed to find some support around $50 which marks the 23.6% Fibonacci Retracement of the rally from 14th November to 15th December. But it’s difficult to know if this level will prove significant going forward. After all, we’ve had a very strong rally in the lead up to, and immediately following, last month’s OPEC meeting. The big question now is if there’s anything left which can help to lift prices further. Admittedly there’s a meeting this weekend between OPEC and non-OPEC producers to discuss output cuts. However, it’s become clear that the much-heralded cut commitments (1.2 million barrels per day (bpd) from OPEC and a proposal for 600,000 bpd from non-OPEC) announced on 30th November have been offset to some extent by significant production increases since earlier in the year. Earlier this week it was reported that OPEC production hit a fresh record high in November of 34.19 million barrels per day (bpd), up from around 33.6 million bpd in October. On top of this Russian output hit a post-Soviet record of 11.12 million bpd in November. This suggests that OPEC’s commitment to cut production by 1.2 million bpd, along with Russia’s promise to gradually reduce output by 300,000 bpd won’t make much of a dent in existing inventories. Gold and silver rallied in early trade yesterday thanks to a modest pull-back in the US dollar. The Dollar Index dropped below 100.00 helping both precious metals to post modest gains. However, gold and silver lurched lower soon after the ECB announced changes to its quantitative easing programme. This coincided with a sell-off in the euro and corresponding dollar rally after it became apparent that the ECB planned a slight increase to its bond buying programme. The central bank said it would extend its purchases to December 2017 from March 2017 at a rate of €60 billion per month. The market had expected a six month extension at a rate of €80 billion per month. On top of this, ECB President Mario Draghi was relatively downbeat over the outlook for Euro zone growth. It was also made clear that the ECB’s Governing Council was prepared to boost its quantitative easing programme further should it be warranted by weak economic conditions.

    Forex Update

    - Euro rollercoaster follows ECB meeting - Dollar Index soars back above 100.00 It was another volatile session in FX yesterday. The euro soared after the European Central Bank (ECB) announced its monetary policy decisions. But it then succumbed to heavy selling pressure as market participants looked beneath the headlines. The ECB said that it would extend its bond buying from March to December 2017 (slightly longer than the September 2017 end date expected). However, it also said that it would do this at a reduced rate of €60 billion per month, down from the current €80 billion per month rate. The euro soared on the news as traders picked up on the €60 billion number and saw this as evidence of tapering. But overall it was slightly more stimulus than expected. Also in its statement the ECB’s Governing Council made it clear they would increase the programme in terms of size and/or duration should the outlook for growth or inflation “become less favourable.” This led to a sharp sell-off in the euro which was exacerbated when ECB President Mario Draghi emphasised downside risks to the central banks Euro zone growth forecasts.

    Upcoming events

    Today’s key economic data releases include the German Trade Balance, French Government Budget Balance and French Industrial Production. From the UK we have the Goods Trade Balance, Construction Output and Consumer Inflation Expectations. From the US we have Consumer Sentiment, Wholesale Inventories and Inflation Expectations.

    Disclaimer: Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. As a marketing communication it is not subject to any prohibition on dealing ahead of the dissemination of investment research, although Spread Co operates a conflict of interest policy to prevent the risk of material damage to our clients.