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Markets drift ahead of weekend - AM Briefing
24 Nov 2017
US closed for Thanksgiving - AM Briefing
23 Nov 2017
Wall Street hits fresh record highs - AM Briefing
22 Nov 2017
The UK100 and sterling - PM Bulletin
21 Nov 2017
Equities drift in featureless trade - AM Briefing
21 Nov 2017
German coalition talks collapse - AM Briefing
20 Nov 2017
Quiet start after Wall Street surge - AM Briefing
17 Nov 2017
Global stock indices steady - AM Briefing
16 Nov 2017
Is this the start of a stock market correction? - Video Update
15 Nov 2017
Crude sell-off rattles investors - AM Briefing
15 Nov 2017
GBPUSD testing support - PM Bulletin
14 Nov 2017
Central bankers meet in Frankfurt - AM Briefing
14 Nov 2017
Sterling under pressure - AM Briefing
13 Nov 2017
Indices in retreat ahead of weekend - AM Briefing
10 Nov 2017
Could low volatility trigger a market correction? - Video Update
09 Nov 2017
All quiet on the Western Front - AM Briefing
09 Nov 2017
WTI crude surges through resistance - Video Update
08 Nov 2017
Investor inertia sees equities drift - AM Briefing
08 Nov 2017
Crude in demand - PM Bulletin
07 Nov 2017
Fresh record close for Wall Street - AM Briefing
07 Nov 2017
EURUSD shows clear “head and shoulders” - PM Bulletin
06 Nov 2017
Cautious start to trading week - AM Briefing
06 Nov 2017
Traders look ahead to Non-Farm Payrolls - AM Bulletin
03 Nov 2017
Traders look ahead Friday’s US Non-Farm Payrolls - Video Update
02 Nov 2017
BoE expected to raise rates - AM Briefing
02 Nov 2017
Equities soar on US corporate tax cut hopes - AM Briefing
01 Nov 2017
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 Thursday 02 November 2017

BoE expected to raise rates - AM Briefing

 

 

Early moves

·         Expect first UK rate hike in 10 years

·         Trump to name new Fed Chairman

There was a softer tone across European stock index futures ahead of this morning’s open. This was a reaction to last night’s late sell-off across Wall Street as investors booked profits and brought the major US indices back off their highs. As expected, the Federal Reserve kept interest rates unchanged but left the door open for a 25 basis point hike next month. Now all eyes turn to today’s Bank of England monetary policy decision, inflation report and press conference hosted by Governor Mark Carney. The Bank is expected to raise rates by 25 basis points, reversing the cut made in August 2016 in the wake of the UK’s vote to leave the European Union. According to a survey carried out by Thomson Reuters, the probability of a rate hike today comes in around 90%. However, around 70% of economists believe it is the wrong decision. At 3% CPI inflation may be running a full percentage point over the Bank’s preferred target. However, it’s argued that this is down to the plunge in sterling which followed last year’s Brexit vote. By the same token, uncertainty over the current Brexit negotiations and tepid GDP growth also militate against a hike. But against that UK unemployment stands at just 4.3% - its lowest level since 1975.

Stock Index Update

·         US indices surge again

·         Tax cuts likely and ADP Payrolls pick up

US stock index futures stormed higher yesterday morning but pulled back sharply later in the session on profit-taking. Investors rushed to increase their exposure to equities after President Trump insisted that there was no “phase-in” interval for his corporate tax cuts. On Tuesday investors panicked by speculation that Congress was considering a “gradual” phasing-in of corporate tax cuts which would still see the headline rate as high as 20% in 2022. There was a further pick-up in equities following the release of ADP Payroll data. This showed an increase of 235,000 private sector jobs from September to October - well above the 202,000 expected. However, it’s worth noting that last month’s number was revised down by 15,000. All eyes now turn to tomorrow’s Non-Farm Payroll report.

President Trump is expected to announce his pick for Federal Reserve Chair later today. The two front-runners remain current Federal Reserve Governor Jerome Powell (who is due to deliver a speech later today) and Stanford economics professor John Taylor. The favourite remains Mr Powell, and his appointment seems likely to garner the most positive market reaction. Mr Powell is a dyed-in-the-wool centrist dove who would never dream of uttering a controversial word. By contrast, Professor Taylor is viewed as more hawkish and unpredictable. It’s worth noting that there’s still an outside chance that the president appoints Janet Yellen for a second term. This would be surprising, but probably market-positive as it would ensure continuity.

Commodities Update

·         WTI breaches resistance

·         Gold and silver up on short-covering

Yesterday saw Brent crude push further above $60 per barrel while WTI broke above $55. Brent went on to hit its highest level since July 2015 while WTI surged above the upper band of resistance that has held back prices since March this year. The latest move follows the release of a large drawdown in US inventories and after OPEC reports 92% output cut compliance in October. The upside momentum has been building since this summer after oil sold off on evidence of weakening global demand and record high stockpiles. However, the last few months have seen bearish investors capitulate as doubts grew over the ability of US shale oil producers to increase output. It was the belief that US producers would step in to fill any gaps in supply following the OPEC/non-OPEC production cut agreement which led to crude’s sell-off between April and June. However, the current thinking is that the 1.8 million barrel per day (bpd) output cut is finally having an effect on global stockpiles. This week’s US inventory data has helped to reinforce that view.

Gold and silver moved sharply higher in early trade yesterday, despite a pick-up in the US dollar. Typically, dollar-denominated commodities fall as the dollar rises as it becomes more expensive for non-dollar holders to purchase them. Certainly, both gold and silver have pulled back sharply since early September in moves which inversely correlate with a dollar rally over the same period.

There were a number of reasons given for yesterday’s move. These included growing safe-haven demand given the uncertain political situation in Spain. This seems rather tenuous: one might just as well blame the uncovering of a bunch of sex pests in in the UK parliament. Other reasons for the pick-up in prices included uncertainty over who would emerge as the next Federal Reserve Chairman, worries over last night’s Fed meeting and concerns over ties between Trump contacts and Russia. But it’s probably fairer to say that both metals looked oversold to traders in the current environment, and represent comparatively cheap insurance at current levels.

Forex Update

·         Federal Reserve leaves rates unchanged

·         BoE expected to announce rate hike today

The dollar was firmer in yesterday’s European session as traders prepared themselves for the Federal Reserve rate decision and accompanying FOMC statement. As expected, the Fed left rates unchanged and kept the door open for a 25 basis point hike in December.

Now all eyes turn to the Bank of England, its rate decision, Inflation Report and Governor Mark Carney’s subsequent press conference. The consensus view is that the Bank will raise rates for the first time in over ten years. However, traders will want to know how close the decision is in terms of the nine voting members of the Monetary Policy Committee (MPC). But most importantly, market participants will be looking for clues as to whether the rate hike is a “one and done,” which would be negative for sterling, or the first step in a process of monetary tightening from the Bank. The latter should prove positive for sterling, but may weigh on the FTSE100 going forward. The MPC has to weigh up how it deals with CPI inflation at a full percentage point over the Bank’s 2% target together with the lowest unemployment rate since 1975, against tepid economic growth and uncertainty over Brexit. One thing is for sure: if the Bank holds off from raising rates today, sterling will sell off sharply.

Upcoming events

Today’s significant events and economic data releases include Manufacturing PMIs from Spain, Italy, France, Germany and the overall Euro zone. From the UK we have Construction PMI and the Bank of England’s rate decision, Monetary Policy Summary, Inflation Report and subsequent press conference hosted by Governor Mark Carney. From the US we have Weekly Jobless Claims plus speeches from potential Fed chair Jerome Powell and Federal Reserve Bank of New York President William Dudley.

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Posted by David Morrison

Tagged: crudeoil GBPUSD Brexit BoE EURGBP

Category: AM Bulletin


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