Incisive market commentary from David Morrison

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Early moves

·         Firmer start for European equities

·         Sterling flat ahead of inflation data

For a second consecutive session European stock indices were firmer soon after this morning’s open. Investors seem relieved that Wall Street managed to recoup early losses yesterday to eke out modest gains by the close. Asian Pacific stock indices were also little-moved overnight with the Nikkei unable to make back its heavy losses from Monday.

In FX the dollar and euro are both pushing higher against other currencies although the euro is having the best of it in early trade. Later today central bank heads Janet Yellen, Mario Draghi, Haruhiko Kuroda and Mark Carney will take part in a panel discussion hosted by the ECB in Frankfurt. Meanwhile, sterling is little-changed against the dollar (although weaker against the euro) as investors await the release of UK inflation data. Some are also sitting on their hands ahead of the Brexit Bill which is due to be debated in parliament today and tomorrow.

Stock Index Update

·         Wall Street ekes out modest gain

·         GE to halve dividend pay-out

Yesterday European stock indices gave up early gains and traded weaker across the board. Even the FTSE100 succumbed to selling pressure, despite ongoing weakness in sterling. Typically, the FTSE100 benefits from a fall in the pound due to a heavy weighting of constituents whose earnings come from overseas sales. Sterling weakness makes exports cheaper (so boosts sales outside the UK) while a lower exchange rate is also helpful once profits are converted back into sterling.

Yesterday investors were rattled by a sharp sell-off in the Japanese Nikkei and a pull-back in US stock index futures. However, the latter made back early losses as the session progressed and this led to the European majors bouncing off their lows top record modest losses on the day. The US majors ended the day modestly higher.

General Electric (GE) announced that it was cutting its dividend by 50% taking it down to $0.12 from $0.24. GE’s new CEO John Flannery said the conglomerate needed to free up capital to pay for changes needed to affect a turnaround. This is only the third time GE has cut its dividend since 1899, and the first time due to problems within the company itself. The stock jumped 2% on the news although it turned sharply lower soon after the US open. It ended the day 7.2% lower and is currently down around 35% so far this year.

Commodities Update

·         Brent and WTI consolidate

·         Gold and silver rally into European close

Crude prices were mixed yesterday. Both Brent and WTI appear to be consolidating following recent gains. Last week the two contracts hit levels last seen in the summer of 2015. Prices have drifted a touch but that’s to be expected given the rally in crude since June this year. WTI is up around 38% in the last 5 months while Brent has rallied around 45%. These gains have come about for a variety of factors such as falling global inventories, increased estimates of future demand growth and uncertainty over the outlook for US shale oil. But there’s also been renewed speculation that the current OPEC and non-OPEC production cut agreement will be extended from March 2018 to the end of next year. There is also speculation that the output cut will be increased from the current 1.8 million barrels per day. We will know more at the end of this month during the OPEC meeting in Vienna. Yesterday the cartel revised up its forecast of global demand growth by 74,000 barrels per day (bpd) which it now sees rising by 1.53 million barrels per day.

Gold and silver spent most of yesterday’s session little-changed and stuck in narrow ranges. To some extent this reflected a lack of movement in the US dollar as both the EURUSD and Dollar Index spent most of Monday relatively unmoved. But whatever the reason for the lack of volatility, there was relief that precious metals managed to consolidate following the sharp sell-off just before the European close on Friday. This was triggered by an indiscriminate sell order (10% of average daily volume in one order) in the US gold futures market which resulted in the gold price falling $10 (or just under 0.8%) in just fifteen minutes. Silver lost 2% over a similar timeframe.

Just ahead of yesterday’s European close, gold and silver rallied. This was despite no obvious triggers, such as a decline in the dollar, although there was further speculation that the Trump administration won’t be able to get tax reform through Congress this year.

Forex Update

·         Sterling falls sharply on political concerns

·         EURUSD becalmed

Sterling was sharply lower in early trade yesterday as investors reacted to political woes in the UK. Prime Minister Theresa May came in for a battering over the weekend with some commentators speculating that she could be ousted from her job before Christmas. This followed news that there are now around 40 MPs in her own party who are prepared to sign a letter of “no confidence” in her leadership. This is just 8 short of the number needed to trigger a leadership contest. Mrs May has been savaged ever since she lost her majority in an unforced General Election back in the summer. Since then she’s suffered the fallout from a dreadful party conference address, has lost two of her ministers and is caught between bitter Remainers and impatient Leavers within her own party against a background of Brexit negotiations which are going nowhere. Despite this, most Tories calculate that she’s better than any of the alternatives as leader and cable is still (just) trading in an upwardly-trending channel.

Meanwhile, the euro and US dollar spent most of yesterday stuck in narrow trading ranges. Investors are beginning to consider that the dollar’s rally since September may be coming to an end.

Upcoming events

Today’s significant events and economic data releases include German GDP, CPI and the ZEW Economic Sentiment survey. From the UK we have CPI, RPI and HPI. From the Euro zone we have Flash GDP, Industrial Production and the ZEW Economic Sentiment survey. From the US we have PPI. There are also speeches from central bank heads Janet Yellen, Haruhiko Kuroda and Mark Carney who are all in Frankfurt for a conference hosted by the ECB.


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Posted by David Morrison

Tagged: ECB FED BoE BankofJapan nikkei

Category: AM Bulletin

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