Indices UpdateThere’s a firmer tone across equity markets this morning. The improved sentiment follows on from a late rally on Wall Street last night which was triggered to some extent by a sharp pick-up in the oil price. Crude is stronger again in early trade this morning and this is helping to underpin European equities. However, it’s worth noting that both the Dow and the S&P 500 are still trading towards the bottom of recent ranges (which come in at 18,000 and 2,120 respectively). A weak close tonight could unsettle investors as we get closer to the US Presidential Election. Global equity markets sold off sharply yesterday and there seem to be a number of factors which were contributing to investor nervousness. Yesterday saw the release of poor trade data from China. The Trade surplus came in at $42 billion on expectations of $53 billion. Exports fell 5.6% year-on-year while imports rose 2.2%. The consensus expectation had been for increases of 2.5% and 5.5% respectively. This was the smallest trade surplus in six months and raised concerns over the rate of slowdown in the world’s second-largest economy. China has been out of the headlines for a while now but this data also reminded investors that the Chinese yuan has been declining steadily for over a week now. On Wednesday night the US Federal Reserve released the minutes of its Federal Open Market Committee (FOMC) meeting from September. Back then three FOMC members - Esther George, Loretta Mester and Eric Rosengren dissented and voted for an immediate 25 basis point hike. So, last night’s release of the minutes from this meeting were of some interest. But there was some argument concerning whether the minutes were dovish or hawkish. Some of the key points: several FOMC members said that the decision to wait was a “close call” and several said that they saw a rate hike coming “relatively soon.” It was also noted that a “reasonable argument” could be made for a hike and that several participants were concerned that another delay “risked eroding its credibility, especially given that recent economic data had largely corroborated the Committee’s economic outlook.” On the face of it this all sounded pretty hawkish and keeps live the prospect of a December rate hike. However, the market reaction suggested that investors viewed them as dovish as the dollar sold off and precious metals rallied. The major US stock indices ended little-changed and it’s difficult to work out if yesterday’s sell-off was on the prospect of monetary tightening, nervousness ahead of the election or concerns over corporate earnings and China’s declining Trade Surplus. The FTSE 100 ended the day 46.3 points lower at 6,977.7 The German DAX fell 109 points or 1.04% to end the day at 10,414.1 The US30 closed 45.3 points lower at 18,098.9. The S&P 500 ended down 0.3 % at 2,132.6 while the Nasdaq 100 fell 0.3% to close at 4,803.1
EquitiesTesco (TSCO) got into an unseemly public spat with consumer products manufacturer Unilever (ULVR). The supermarket giant got the hump after Unilever increased its prices on a range of products (including Marmite, Comfort, PG Tips and Hellman’s Mayonnaise) by 10% blaming the weaker pound and Brexit vote. Tesco removed Unilever’s products from its online store. Late last night it was revealed that the two sides have come to an accommodation, but decided not to make their deal public. Despite this, neither company comes out smelling of roses. Few are likely to view Tesco as a genuine champion of the consumer and the company has a long history of beating down its suppliers on price. Meanwhile, Unilever’s actions are viewed as profiteering while pushing a pro-EY agenda. Tesco ended the day 3% lower at 195.1 pence while Unilever lost 3.4% to close at 3,596.5 pence.
Commodities UpdateOn Wednesday evening the American Petroleum Industry (API) released its latest update on US oil inventories. Crude stockpiles registered their first increase in six weeks rising by 2.7 million barrels on expectations of a 2 million barrel build. Stocks at the Cushing, Oklahoma hub and for gasoline were also sharply higher. The report helped to keep a lid on crude which was trying to push higher after two days of steep declines. However, traders were wary of pushing prices too far in any particular direction ahead of yesterday’s inventory update from the International Energy Administration (EIA). The EIA report confirmed the build in US stockpiles. Crude inventories rose 4.9 million barrels for the week ending 7th October on expectations of a 400,000 barrel build. But this figure was offset to a great extent by sharp decreases in gasoline and distillate inventories. Traders appeared uncertain how to respond to the news. However, it wasn’t long before prices began to creep higher. Then both contracts rallied hard in the US session. Despite this, crude has so far failed to break convincingly above the multi-month highs hit in early June. However, it’s too early to tell if this is the start of a serious correction or consolidation ahead of another leg higher. Doubts have been creeping in about OPEC’s commitment to cut production and there are fears that the OPEC-inspired rally since August risks destabilising the oil market over longer-term. If OPEC fails to agree to cuts and quotas at its November meeting, then markets will have to deal with additional supply that has come as a direct result of the rally in oil since the Algeria meeting. This comes from both OPEC and non-OPEC countries. OPEC members are desperately boosting production in order to capitalise on higher prices and ahead of any quota agreement in November. OPEC has just said that its production is now at the highest level in over eight years. Meanwhile, the big non-OPEC producers (Russia and the US) are doing the same thing. Yesterday saw gold and silver continue to trade in narrow ranges. Both metals tried to push higher but struggled even as the US dollar drifted lower. The two precious metals appear to be consolidating at lower levels following last week’s sell-off. Despite this, investors seem wary of taking on any additional exposure at current levels. The trouble seems to be that there was little reason for last week’s slump. All it took was some wild speculation that the Fed could hike in November and a modest spike in the dollar for gold and silver to scythe through significant support and trigger a wave of stop orders. As a consequence, it may take some time for market confidence to return.
Forex UpdateOn Thursday the Dollar Index pulled back from a seven-month high as investors fretted about a decline in equities, weak Chinese trade data, the third quarter earnings season, European banking concerns and the sell-off in sterling amid uncertainty over what path the UK’s Brexit negotiations may take. At the same time, there were gains for the Japanese yen and Swiss franc – two currencies that typically do well in times of uncertainty due to their perceived status as safe havens. Yesterday saw the release of poor trade data from China. The Trade Surplus came in at $42 billion on expectations of $53 billion. Exports fell 5.6% year-on-year while imports rose 2.2%. The consensus expectation had been for increases of 2.5% and 5.5% respectively. This was the smallest trade surplus in six months and raised concerns over the rate of slowdown in the world’s second-largest economy. China has been out of the headlines for a while now but this data also reminded investors that the Chinese yuan has been declining steadily for over a week now. Minutes from the Fed’s September meeting were released on Wednesday evening. These highlighted the split within the FOMC over monetary policy. Three committee members favoured hiking rates at the September meeting, fearing that any delay would only damage the US central bank’s credibility. The minutes showed that the central bank continues to juggle with two conflicting ideas. On the one hand it is desperate to persuade investors that the US economy is robust and that targets for employment and inflation are close to being met. On the other, FOMC members have to come up with good reasons to explain why it continues to hold off from hiking its Fed Funds rate.
Upcoming eventsToday’s significant economic events include the Bank of England (BoE) Credit Conditions survey, UK construction Output and Euro zone Trade Balance. We also have speeches from BoE Governor Mark Carney and MPC member Kristen Forbes. From the US we have Retail Sales, PPI, Consumer Sentiment, Inflation Expectations and Business Inventories. Federal Reserve Chair Janet Yellen delivers a speech (but unlikely to mention monetary policy) at 1.
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