Early moves- US rally gives European equities a lift - S&P breaks above resistance There’s a positive tone across European equity markets this morning thanks to last night’s rally on Wall Street. The move saw the S&P500 break and close above 2,275 which marks the top end of a range which has been in place since early December. US stock index futures are firmer again this morning with the Dow closing in on the psychologically important 20,000 level. The trigger for this latest push was Donald Trump’s televised signing of a number of executive orders. President Trump swept aside environmental concerns and signed orders to expedite the Keystone XL and Dakota Access pipelines while ensuring US steelworkers manufactured the pipes themselves. Investors now expect Mr Trump to be equally as bullish in following through on his promises to cut taxes, roll back regulations and boost infrastructure spending. However, these issues require him to work out deals with Congress and these will prove to be more problematic. Yesterday the Supreme Court voted by a majority of eight to three to dismiss the government's appeal in the Article 50 case. The ruling means MPs must be given a vote before the Brexit process can begin. But the Court also said devolved parliaments in Scotland and Wales do not need to be consulted before Article 50 is triggered. Sterling fell on the news but subsequently rallied to close higher on the day.
Stock Index Update- Equity markets recover - Trump advances controversial oil pipelines European stock indices bounced yesterday following Monday’s sell-off. All the majors ended the session back in positive territory as investors reassessed the outlook for equities in the aftermath of Donald Trump assuming the presidency. There had been some nervousness at the beginning of the week following Trump’s bombastic “America First” inauguration speech, his dumping of the Trans Pacific Partnership and his announcement that he would be renegotiating the North American Free Trade Agreement (NAFTA) with Canada and Mexico. This raised concerns that the US was becoming isolationist and that global trade could now come under threat from tit-for-tat protectionist measures. But President Trump also reminded everyone that he aims to get business tax rates down to 15-20% from 35%, reward companies manufacturing in US, impose border taxes on products made abroad by US companies and cut taxes for middle classes. He also said he would be cutting back regulation massively, while rules would still be “just as protective of the people.” As European bourses closed, Mr Trump was busy signing executive orders to expedite the Keystone XL and Dakota Access pipelines while ensuring US steelworkers manufactured the pipelines. The televised event helped to lift US equities and push the Dow up to close within 100 points of its seemingly elusive 20,000 target.
Commodities Update- US shale oil drillers increase production - Gold and silver react to dollar Crude oil was back in rally mode in early trade yesterday after a sharp dip lower on Monday. There was little fresh news to move the market and it looked as if the change was trader-driven rather than anything fundamental. Monday’s sell-off came despite news that OPEC and non-OPEC producers were broadly sticking to their commitment made back in November to cut production. However, those involved in the agreement said that in the first three weeks since implementation they had reduced output by 1.5 million barrels per day (bpd), a bit below the 1.8 million bpd target. However, the current commitment runs through until June so the expectation is that the target will be hit when averaged out. Oil services company Baker Hughes said that for the week ending 20th January oil rigs rose by 29 to 551. This was the biggest one-week increase since April 2013. This latest report is further evidence that US production should continue to rise strongly just as other producers are cutting output. Total US oil production is up more than 6% since the summer of 2016. While it is still around 7% below its record highs from 2015 it is back to levels last seen late in 2014. Gold and silver were weaker in early trade yesterday thanks to a recovery in the US dollar. The greenback fell back below significant support levels while the EURUSD tested resistance around 1.0750. But both metals rallied later in the session as the dollar gave back early gains. It was difficult to pinpoint a specific reason for the turnaround in the greenback other than as a continuation of the profit-taking sell-off since the beginning of the year. However, it’s also fair to say that precious metals have put in a decent recovery after falling to multi-month lows in early December. Back then it became apparent that both metals were oversold. However, it also required a trigger for investors to come back in and push gold and silver back above significant chart levels of $1,200 and $17 respectively. The prevailing wisdom is that investors began to stock up on both as a hedge against damaging policy moves from Donald Trump. But in the absence of a pick-up in stock market volatility, both metals rely on a weaker dollar to make further gains.
Forex Update- Sterling weaker on Brexit decision - Dollar Index breaches support Yesterday morning all eyes were on the British pound ahead of the Supreme Court ruling on whether or not the government needs parliamentary approval to trigger Article 50. On Monday sterling had rallied sharply, ending the session above 1.2500 to clock up a rally of close to 4% since UK Prime Minister Theresa May’s “Brexit Speech” last week. As many predicted, the Supreme Court dismissed the government's appeal, voting by a majority of eight to three to dismiss the case, meaning MPs must be given a vote before the Brexit process can begin. But the court also ruled that devolved parliaments in Scotland and Wales do not need to be consulted before Article 50 is triggered. Sterling fell sharply on the news but soon recovered a fair proportion of its losses for the day. But by early afternoon in was the US dollar which was back in focus. On Monday the Dollar Index fell sharply and traded below its key 100 level for the first time since early December. It subsequently bounced, but then sold off again soon after the US stock market opened. The dollar continues to look vulnerable to further losses with the Dollar Index now down over 3.5% since it hit a 14-year high at the beginning of the year. If it continues to struggle to recover this week, it would suggest that investors are less concerned about rate rises in a pick-up in US inflation than previously considered.
Upcoming eventsToday’s significant economic data releases include the German Ifo Business Climate Survey and UK CBI Industrial Order Expectations. From the US we have Crude Oil Inventories.
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