Incisive market commentary from David Morrison

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EURUSD hovers around 1.1800 - AM Briefing
29 Sep 2017
Trump tax reform lifts Wall Street - AM Briefing
28 Sep 2017
What is the Fed trying to tell us? - PM Bulletin
27 Sep 2017
Yellen struggles with inflation - AM Briefing
27 Sep 2017
Can cable’s rally continue? - PM Bulletin
26 Sep 2017
Investors jittery after North Korean threat - AM Briefing
26 Sep 2017
EURUSD slips again - PM bulletin
25 Sep 2017
Merkel scrambles to form coalition - AM Briefing
25 Sep 2017
Caution ahead of weekend - AM Briefing
22 Sep 2017
Fed Meeting Post-Mortem - Video Update
21 Sep 2017
Fed signals another rate hike - AM Briefing
21 Sep 2017
Trading subdued ahead of Fed meeting - Video Update
20 Sep 2017
Fed expected to reduce balance sheet - AM Briefing
20 Sep 2017
FOMC and balance sheet reduction - PM Bulletin
19 Sep 2017
Dow hits fresh record high - AM Briefing
19 Sep 2017
EURUSD continues to trend higher - PM Bulletin
18 Sep 2017
Global indices storm higher - AM Briefing
18 Sep 2017
Investors shrug off NK missile test - AM Briefing
15 Sep 2017
Sterling soars after BoE meeting - Video Update
14 Sep 2017
Bank of England meeting in focus - AM Briefing
14 Sep 2017
Look-ahead to the BoE monetary policy meeting - Video Update
13 Sep 2017
Sterling bounces as inflation picks up - PM Bulletin
12 Sep 2017
Wall Street rally lifts sentiment - AM Briefing
12 Sep 2017
Euro storms higher - AM Briefing
08 Sep 2017
ECB meeting in focus - AM Briefing
07 Sep 2017
EURUSD soars during Draghi’s press conference - Video Update
07 Sep 2017
ECB meeting, a look-ahead to Thursday - Video Update
06 Sep 2017
Wall Street wobbles, but closes off lows - AM Briefing
06 Sep 2017
WTI recovering as clean-up continues - PM bulletin
05 Sep 2017
Investors shrug off North Korean threat - AM Briefing
05 Sep 2017
North Korean nuclear test boosts gold - PM Bulletin
04 Sep 2017
North Korea rattles markets - AM Briefing
04 Sep 2017
High hopes for the latest US jobs release - AM Briefing
01 Sep 2017
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 Friday 22 September 2017

Caution ahead of weekend - AM Briefing



Early moves

·         Investors cut exposure ahead of weekend

·         German election/North Korea weigh on sentiment

We’re seeing a bit of a wobble going into the weekend as investors trim back their risk exposure. European and US stock index futures turned lower this morning while there was a pick-up in precious metals as the dollar continues to give back much of its post-FOMC gains. It’s not surprising that traders would want to book profits after this week’s sharp moves. However, the renewed threat from North Korea is another reason for caution. In addition, there’s still the uncertainty of this weekend’s German elections. Finally, tighter monetary policy from the Fed, along with the prospect of ECB stimulus reduction looks likely to weigh on equities and bonds going forward.

Stock Index Update

·         Equities lower on profit taking

·         Investors weigh costs of tighter monetary policy

Yesterday brought mixed results for stock indices. Most of the European majors ended the session with decent gains while the UK FTSE100 finished little-changed. But US indices were under pressure for most of the day.

On Wednesday the Dow and S&P500 both closed out at fresh record highs, helped higher by big gains for the banking sector. This got a lift following the release of the FOMC’s “dot plot” which suggested that the Federal Reserve was more hawkish than previously considered. The US central bank is now predicting another 25 basis point rate hike this year with three more to follow in 2018. This will help to normalise monetary policy and also boost margins for lenders. However, tighter monetary policy is generally negative for stocks. While it may signal confidence in the US economic outlook, it increases business costs. It can also be disruptive as individuals adjust to a new environment.

But it’s important to bear in mind that quantitative easing isn’t all about the Fed. The Bank of Japan (BOJ) and European Central Bank (ECB) continue to add about $125 billion of stimulus every month.  So far this year global central banks have bought around €2 trillion of financial assets. While there’s speculation that the ECB will start to wind down its €60 billion per month bond buying programme early next year, it’s likely to be at a slow pace. Meanwhile, at yesterday’s BOJ meeting Governor Haruhiko Kuroda made it clear that monetary stimulus would continue for now.

Commodities Update

·         Crude hovers around multi-month highs

·         Precious metals recover as dollar slips

Brent and WTI crude continue to hover around the multi-month highs made during Wednesday’s session. Both contracts drifted a touch yesterday afternoon but this appeared to be little more than profit-taking and position squaring ahead of today’s meeting of oil producers in Vienna. OPEC and a number of non-OPEC producers, led by Russia, are getting together to discuss the possibility of extending their output cut agreement made last year. The timeline for cut has already been extended once, by nine months to March 2018. However, global inventories remain high and this is weighing on the oil price and causing considerable discomfort to those countries that rely on crude exports to keep their economies buoyant. Any extension to the output cut would help to rebalance the market, particularly as demand growth is expected to pick up next year. However, what would really create a significant shift would be an agreement to make a deeper cut than the current 1.8 million barrels per day.

Gold and silver have steadied this morning as investors rush to square positions ahead of the weekend. There’s also some safe-haven demand as North Korea continues to pump out provocative rhetoric while a pull-back in the US dollar has also helped to encourage buying. The two precious metals fell sharply after Wednesday night’s Federal Reserve meeting. The initial sell-off could be blamed to a great extent on the dollar rally which greeted an apparently more hawkish Fed. However, the decline continued yesterday even though the dollar pulled back from its best levels. Gold’s decline took it below a number of significant support levels, including $1,300 and $1,295. Yesterday afternoon gold broke below $1,290 taking it back to levels seen around the time of the Fed’s last big meeting in June.

Forex Update

·         Dollar giving back post-FOMC gains

·         Upside EURUSD trend remains in place

The dollar weakened a touch over the course of yesterday and has continued to do so this morning as traders trim back speculative long positions put on in the aftermath of Wednesday’s Fed announcements. As expected, the US central bank kept interest rates on hold and confirmed that its balance sheet reduction plan (as outlined in June) would begin next month. However, the dollar rallied sharply as investors reacted to the release of the FOMC’s quarterly update to its Summary of Economic Projections. The committee’s longer-term forecasts for unemployment, GDP growth and inflation were all unchanged from June. However, an increased number of FOMC members anticipate that there should be another 25 basis point rate hike before the year-end. In addition, there’s growing consensus that there should be a further three rate rises in 2018. This outlook was considerably more hawkish than anticipated and the dollar flew higher in response. The question now is whether this could see the dollar continue to strengthen from here or if this is simply a period of consolidation?

Upcoming events

Today’s significant events and economic data releases include French, German, Euro zone and US Manufacturing and Services PMIs. We also have Canadian CPI and Retail Sales. UK Prime Minister will deliver a key speech on Britain's post-Brexit relationship with the European Union while ECB President Mario Draghi will speak in Dublin.


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Posted by David Morrison

Category: AM Bulletin

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