• AM Bulletin: US indices hit fresh all-time highs

    Indices Update

    The Dow, NASDAQ and S&P all closed out at fresh record highs last night in what could best be described as a low-volume melt-up. The move helped to sustain what many analysts and traders have called “the most hated bull market in history”. Waves of monetary and fiscal stimulus since the financial crisis have found their way into equity and bond markets so we now have the unusual situation of both investments trading at all-time highs. This has been helped along recently by better US data combining with a belief that the US Fed is unlikely to tighten monetary policy before the year-end. It was another mixed start for European equities and US stock index futures yesterday morning. However, the major US indices flew higher later in the day taking others with them as crude oil surged. The rally in oil came on the back of comments from Saudi Arabia's energy minister. Khalid al-Falih said producers would discuss action to stabilize prices if necessary when they met with major consumers next month in Algeria. Speculation of an output freeze sent oil prices flying higher earlier this year. They continued to rally even when the April meeting ended amid recriminations and no agreement. Why this time should be different is anyone’s guess. However, it feels as if there’s a short squeeze going on in crude and this is helping to lift equity markets. As noted yesterday, a higher oil price reduces the risk of companies in that sector running into difficulties given their high debt levels. The FTSE 100 index closed up 48.3 points, or 0.7%, to end the day at 6,914.7 The German DAX rose 92 points or 0.9% to end the day at 10,742.8 The US30 closed up 117.9 points to finish at 18,613.5. The S&P 500 up 0.5% to close at 2,185.8 while the Nasdaq 100 finished 0.4% higher at 4,803.3

    Equities

    Glencore (GLEN) reported a significant decline in output for most of its products for the first six months of 2016. The mining and commodities trading giant said it had closed mines in response to falling prices. Glencore, the world’s biggest zinc producer, reported a 31% slump in zinc production. The company said it was prepared to leave the metal in the ground rather than sell at depressed prices. Copper production, which made up most of Glencore’s revenues, was down 4% while coal declined by 14%. Glencore will give a financial update later this month and report on its debt reduction plan. The stock ended the day up 2.4% at 200 pence.

    Commodities Update

    Crude began trade yesterday on the back foot following Wednesday’s sharp sell-off. However, oil shot higher soon after the US open in a move that took both WTI and Brent up around 3% higher on the day and back above key technical trading levels of $42 and $44 respectively. The catalyst for the move was comments from Saudi Arabia's energy minister who suggested producers may discuss taking steps to stabilize prices. Khalid al-Falih said that the International Energy Forum, a group of major oil producers and consumers, would consider the oil market situation at meetings due to take place next month in Algiers. He also said that Saudi Arabia would work with OPEC and non-OPEC producers to help rebalance the market if necessary. Oil prices were also supported after the International Energy Agency (IEA) predicted that crude markets would rebalance in the next few months, with oil stocks expected to decline in the third quarter of this year for the first time in more than two years. However, the IEA also lowered its forecast for global oil demand in 2017 saying that the world will consume less oil next year than previously thought due to a "dimmer macroeconomic outlook". Yesterday’s move could be yet another short-covering rally as speculators got caught on the wrong side of a sharp initial move. The important thing now is whether WTI and Brent can now hold above support around $42 and $44 respectively. If not, then we could see crude decline further. However, traders will be mindful of the rally that took place earlier in the year in the lead-up to the abortive Doha meeting to agree to an output freeze. Gold and silver had a relatively quiet session yesterday. The two precious metals spent most of the day little-changed although they dipped lower as the US dollar made gains soon after the European close. Both metals tend to move inversely to the greenback. Traders will be playing particularly close attention to this afternoon’s data after a few quiet days as far as economic releases are concerned. Later on we have US Retail Sales, PPI, Consumer Sentiment, Inflation Expectations and Business Inventories. Retail Sales is the most significant. We can expect the dollar to rally and precious metals to fall on a good number as this increases the likelihood of a Fed rate hike sometime this year. A bad number should see gold and silver push higher and the dollar decline. Figures from the World Gold Council (WGC) showed that investor appetite for gold remains strong. Investment demand hit a fresh record of 1,064 tons for the first six months of the year with investors piling into Exchange Traded Funds (ETF). The WGC reported that for the second successive quarter investment overtook jewellery as the largest component of gold demand.

    Forex Update

    It was a relatively uneventful session in FX yesterday with the major currency pairs mixed and showing no discernible overall trend. The only exception as far as the majors were concerned was sterling which drifted lower against both the dollar and the euro. The British pound slipped after the Royal Institute of Chartered Surveyors released its latest update on house prices. This came in at +5% showing a small increase in the number of surveyors reporting a price rise in their designated area. This was a three-year low and well under the 19% expected. Investors saw this as evidence of a lack of confidence following the Brexit vote. However, the sell-off in sterling since then looks likely to encourage foreign investment which took a hit following George Osborne’s attack on buyers of second properties in his last budget. Meanwhile the New Zealand dollar rallied sharply following the Reserve Bank of New Zealand’s (RBNZ) decision to cut its headline interest rate by 25 basis points to 2%. The cut was expected, and the RBNZ backed it up by saying the central bank was ready to loosen monetary policy further. But traders piled into the NZ$ on the long-side, no doubt considering the relatively attractive yield still available on the currency. This time last year, the People’s Bank of China (PBOC) devalued the yuan by around 2% against the dollar, leading to a stock market meltdown and all-round turmoil. The PBOC devalued the yuan again in January this year, roiling financial markets yet again. However, it’s worth noting that the central bank has been more successful when it acts stealthily – it has continued to weaken its currency which has now lost 7% against the dollar over the past 12 months.

    Upcoming events

    There are a number of significant data releases due out today including German GDP, CPI and WPI. We also have French Non-Farm Payrolls, Italian GDP, UK construction Output, Euro zone GDP and Industrial Production. From the US we have Retail Sales, PPI, Consumer Sentiment, Inflation Expectations and business Inventories.

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