• AM Bulletin: Quiet start to Friday’s trade

    Indices Update

    It has been a relatively quiet start for the major stock indices so far this morning. Overall there’s a slight negative bias but this could be no more than a touch of position-squaring after this week’s rally and ahead of the weekend. Investors are well aware of Sunday’s meeting in Doha between OPEC and non-OPEC producers to discuss a freeze on crude output. Equity movements have a strong positive correlation to the oil price so we may see some profit-taking now given the uncertainty which surrounds the meeting. Overnight Chinese GDP posted its lowest print for seven years. However the official number of 6.7% for the first quarter annualised was as expected. Industrial Production shot up to +6.8% year-on-year, well above the 5.9% expected. But overall the market reaction was muted with only the Australian dollar registering any sign of cheer. It was a mixed start for European and US stock indices yesterday. Europe was generally firmer as it once again played catch-up following a strong Wall Street rally on Wednesday night. But US index futures were a touch weaker first thing as crude oil pulled back from earlier highs. Ahead of the US open Bank of America (BAC) and Wells Fargo (WFC) both released earnings and revenues well below those from the same period last year. The number 2 and 3 US banks by assets were both marked modestly lower in pre-market trade. Meanwhile, BlackRock (BLK) the world’s biggest asset manager reported earnings per share of $4.25 for the last quarter which was 4 cents below the consensus estimates. The stock was trading 1.8% lower ahead of the US open. Despite a poor start to the earnings season for US banks, there’s been no shortage of buyers for stocks in general. This is due to the belief that banks have just worked through their worst quarter since the banking crisis over six years ago. Banking stocks have been out of favour since the end of last year. Consequently, expectations for earnings and revenue have been lowered sharply. Even a small miss isn’t punished as severely as it perhaps should be. Nevertheless, the broader US market as measured by the Dow Industrials and S&P500 is within a few percent of the all-time highs hit just under a year ago. At the same time US corporate earnings have already registered two successive quarters in decline (an “earnings recession”) and this is projected to be a third. Investors continue to climb the “wall of worry” and pay high prices to get exposure to equities. For the time being they seem resigned to push any concerns they have about high p/e multiples to one side, and only ditch stocks when the oil price falters. The FTSE 100 index closed at 6,365.1 up 2.2 points on the day The German DAX rose 67.6 points or 0.7% to finish at 10,093.7 The US30 closed up 18.2 points to finish at 17,926.4 The S&P 500 ended effectively unchanged at 2,082.8 as did the Nasdaq 100 which closed at 4,554.6  

    Equities Update

    FTSE 250 constituent Hays (HAYS) reported an increase in like-for-like fees of 4% in the three months to 31 March. The company also said it expected market forecasts for operating profits for the year ending in June to move up from the current consensus of £177 million. The UK-based international recruitment company said it expects to start making special dividend pay-outs from next year, as strong growth across Europe drove it to its 12th consecutive quarter of year-on-year fee growth. Recruiters like Hays are seen as economic bellwethers because people tend to switch jobs more often when confidence levels rise. The stock rose 7.5% to close at 133.4 pence

    Commodities Update

    Crude began yesterday’s session on the back foot but picked up as the day progressed. The tendency seemed to be for prices to oscillate around the previous day’s close with no overall trend in evidence. Traders will be thinking ahead to tonight’s close and deciding whether to take a gamble on the outcome of Sunday’s meeting in Doha or squaring positions ahead of the weekend. Yesterday the International Energy Agency (IEA) released its latest report on the oil market. While it calculated that the impact of an output freeze deal "will be limited" it noted that supply/demand rebalancing was already taking place in the market. The IEA said that falling US production and a drop in output from non-OPEC producers would help the oil market "move close to balance" in the latter half of 2016. It said that although the world would “still produce more oil than it consumes throughout 2016” it estimated that world surplus would diminish to 200K barrels a day. Earlier this year the surplus was estimated to be anything between 1.5 and 2 million barrels per day. On Tuesday gold briefly poked its head above $1,260 an ounce to hit its best level for a month. The push higher corresponded to the Dollar Index breaking below 94.00 to hit its lowest level since the China-inspired stock market turmoil back in August last year. However, the dollar has spiked higher over the last few days. The Dollar Index has tacked on around 1.5% from its low this week while gold has lost over 2% in the same period. Gold fell again yesterday and spent most of the session trading below support at $1,240. If the dollar continues to rally then $1,220 is the next obvious support level. Silver has held up quite well in contrast and bulls will be hoping that it can hold above $16 per ounce on the basis of the daily close. If so, and assuming the dollar doesn’t rally much further from here, then there should be more upside to come.

    Forex Update

    For most of yesterday’s session the Dollar Index managed to build on Wednesday’s gains. Against individual currencies the moves were more nuanced, and generally the greenback seemed to be in consolidation mode. It traded in a relatively narrow range against the euro but made decent gains against the British pound. Sterling fell for a second day in a row, although it made back some of its losses following the Bank of England’s latest rate decision and Monetary Policy Statement.  The Bank kept rates on hold at 0.5% as expected, and noted that at 0.5% annualised in March CPI remains well below the Bank’s 2% target.  However the MPC expects inflation to rise over the next year as growth has been steady. The Bank noted the depreciation of sterling over the past month but said that this together with the decline in risk-free interest rates should support economic activity. The Bank also noted that “the likelihood that much of the fall in sterling reflects uncertainty surrounding the forthcoming referendum on the United Kingdom’s membership of the European Union raises questions regarding whether the lower level of sterling will persist and its net economic impact”.

    Upcoming events

    Today’s significant economic events include the release of UK construction Output, the Euro zone Trade Balance and Canadian Manufacturing Sales. From the US we have the Empire State Manufacturing Index, Capacity Utilisation, Industrial Production, Consumer Sentiment and Inflation Expectations. G20 and IMF meetings are also being held.

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