• AM Bulletin: Stocks down on oil, growth fears and UK referendum

    Indices Update

    All the major European and US indices ended lower yesterday and the selling has continued this morning. Investors appear to be retreating into “risk-off” mode. Yet it was only last Wednesday that the Dow ended back above 18,000 to register its highest close since 27th April. On the same day the S&P500 posted its best close in just under a year and ended 0.6% below its all-time record close from May last year. It looked as if the two indices were ready to take out their highs as investors speculated that there was little chance of the US Federal Reserve hiking rates after this week’s meeting. However, US equity markets slipped back on Thursday and Friday and the upside momentum appears to be fading. A big cause of this is concerns over falling bond yields with a record amount of global government debt now with a negative yield. There have been more polls showing that the “Leave” campaign is maintaining its upside momentum in the UK’s referendum on EU membership. This is helping to push funds into the perceived safety of government debt. Crude oil has also pulled back from multi-month highs and WTI and Brent are trading below $50 this morning. At the same time investors are wary about the ongoing strength of the Japanese yen. Last night the USDJPY closed out at its lowest level since October 2014. In early trade this morning it was back below 106.00. The US Federal Reserve’s FOMC begins a two-day meeting today, and the expectation is that the central bank will hold off from raising rates once again. While a continuation of the Fed’s easy money policy should support stocks, there are concerns that the US economic recovery isn’t as robust as the Fed would like us to believe. Certainly, the latest Non-Farm Payroll release from earlier this month has made many investors question the underlying strength of the US employment situation. This had previously been one of the most positive areas of the economy. The FTSE 100 index closed down 70.8 points, or 1.2% at 6,044.97 The German DAX fell 177.2 points or 1.8% to end the day at 9,657.4 The US30 closed down 132.9 points to finish at 17,732.5. The S&P 500 fell 0.8% to close at 2,079.1 while the Nasdaq 100 lost 0.9% to close at 4,422.8

    Equities

    Yesterday’s biggest bit of news as far as equities were concerned was the announcement that Microsoft (MSFT) was set to buy LinkedIn for $26.2 billion. The deal came out of the blue and is set to be one of the biggest tech deals ever. However, some analysts have commented that Microsoft is paying a very high price for a loss-making company. Microsoft ended the day 2.6% lower while LinkedIn closed up 46.6% at $192.21

    Commodities Update

    Crude oil drifted lower throughout yesterday’s trading session and is down again this morning. Last week both WTI and Brent appeared to be bedding in happily above $50 per barrel. Demand growth was considered to be positive for the price while supply disruptions (Nigeria, Canada and North Africa) were also supportive. However, investors are becoming far more cautious as the summer approaches. There are concerns that global economic growth may not be as robust as previously thought. At the same time there is a great deal of uncertainty attached to the UK referendum next week and Chinese oil imports. There are some suggestions that China’s strategic petroleum reserve is close to capacity. Once that is full then daily demand could drop by as much as 800,000 barrels. Gold and silver continue to build on last week’s gains. Both metals have had a very good run following the poor Non-Farm Payroll earlier this month. The weak data, followed by a hawkish speech from Federal Reserve Chairman Janet Yellen, have effectively ended the likelihood of a summer rate hike from the US central bank. This has led to a sell-off in the US dollar which supports dollar-denominated commodities. At the same time, the prospect of lower rates for longer only boosts the appeal of gold and silver. Finally, investors are buying both thanks to their appeal as safe havens. Not only are there increased concerns over the outlook for global growth, but fresh polls have shown the “Leave” campaign maintain and even strengthen their lead over the “Remainers.” Investors are concerned about the market reaction of a “Brexit” win which could see risk assets sell off aggressively in the first instance.

    Forex Update

    The British pound fell sharply yesterday morning. The sell-off followed a clutch of weekend polls which showed the “Leave” vote continuing to gain momentum ahead of next week’s UK referendum on EU membership. However, sterling rallied back later in the session and ended the day well off its lows. But it is lower again today as yet another poll shows “Leave” ahead. UK polling companies have been widely criticised over the last few years as the vast majority failed miserably to predict the outcome of last year’s general election or the scale of the vote in favour of Scotland remaining part of the Union back in 2014. Prime Minister David Cameron will be desperately hoping that the pollsters have got it wrong again as poll after poll shows a decent lead for those saying they will vote for the UK to leave the EU. Of course, there’s always a chance the polls will be wrong again, but there can be little doubt that the momentum is with the Brexit camp. Meanwhile the Japanese yen continues to strengthen. In early trade this morning the USDJPY dropped back below 106.00. Investors are increasing their exposure to the yen on a mixture of safe-haven buying and concerns that the Bank of Japan’s (BOJ) efforts at monetary stimulus are offering diminishing returns. The BOJ meets later this week and is expected to hold off again from providing further stimulus. Nevertheless, Japanese policymakers will be very unhappy with the yen’s renewed strength.

    Upcoming events

    Today’s significant data releases include inflation data from the UK (CPI, RPI and PPI), Euro zone Employment Change and Industrial Production. From the US we have Retail Sales, Import Prices and Business Inventories.

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