Incisive market commentary from David Morrison

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Collapse 2017 <span class='blogcount'>(348)</span>2017 (348)
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Bounce in oil helps to steady equities - AM Briefing
30 Mar 2017
US stock indices consolidate - Video Update
29 Mar 2017
Risk appetite returns - AM Briefing
29 Mar 2017
S&P500 - Topping out, or consolidating? PM Bulletin
28 Mar 2017
Risk appetite returns after the Trump wobble - AM Briefing
28 Mar 2017
Beware hidden relationships between seemingly unrelated markets - Trading Guides
27 Mar 2017
Risk assets slump in wake of Trump’s healthcare debacle - AM Briefing
27 Mar 2017
Congress vote puts markets on hold - AM Briefing
24 Mar 2017
Markets on hold ahead of crucial vote - Video Update
23 Mar 2017
Tranquil markets await big data - AM Briefing
23 Mar 2017
Investors rattled after equity sell-off - Video Update
22 Mar 2017
US Markets Snap 109-Day Streak - AM Briefing
22 Mar 2017
Crude oil update - PM Bulletin
21 Mar 2017
European markets stable on the open - AM Briefing
21 Mar 2017
Dollar slips after G20 communique - AM Briefing
20 Mar 2017
FOMC post-mortem - Video Update
16 Mar 2017
Rate hike sends stocks higher - AM Briefing
16 Mar 2017
FOMC rate decision and Dutch election in focus - Video Update
15 Mar 2017
Oil rally gives markets lift - AM Briefing
15 Mar 2017
Crude trades at lowest levels since production cut agreement - PM Bulletin
14 Mar 2017
Politicians take centre stage again - AM Briefing
14 Mar 2017
Trading Psychology: Risk Management - Trading Guides
13 Mar 2017
Article 50 deadline approaches - AM Briefing
13 Mar 2017
European stocks push higher after Draghi’s hawkish stance - AM Bulletin
10 Mar 2017
Non-Farm Payroll look-ahead - PM Bulletin
09 Mar 2017
Fed rate hike seems certain - AM Briefing
09 Mar 2017
Market expects Fed to hike rates next week - Video Update
08 Mar 2017
Another twist in the French election - AM Briefing
08 Mar 2017
Odds slashed on Fed rate hike - PM Bulletin
07 Mar 2017
Investors lacking direction this morning - AM Briefing
07 Mar 2017
Fibonacci Retracement - extensions - Trading Guides
06 Mar 2017
Equities slip in early Monday trade - AM Briefing
06 Mar 2017
Modest profit-taking sees US indices post rare loss - AM Briefing
03 Mar 2017
Crude struggles to break above resistance - Video Update
02 Mar 2017
UK baffled by the origins of their favourite brands - PM Bulletin
02 Mar 2017
Fresh record highs for major indices - AM Briefing
02 Mar 2017
All eyes turn to the Fed - Video Update
01 Mar 2017
Markets react positively to Trump speech - AM Briefing
01 Mar 2017
Expand February <span class='blogcount'>(36)</span>February (36)
Expand January <span class='blogcount'>(39)</span>January (39)
Expand 2016 <span class='blogcount'>(483)</span>2016 (483)


Early moves

·         European indices drift

·         Dollar Index breaks below 100

It has been a mixed start for European equities so far this morning, although most of the indices have recovered from an early mark-down. The main feature of Monday’s trade had been initial dollar weakness which came as a reaction to the communique at the end of this weekend’s G20 meeting. Investors were taken by surprise after global finance ministers appeared to bow to pressure from the US and dropped their commitment to oppose protectionism. It is felt that this could usher in an era of tariffs, stricter border controls and less free trade which can only result in more expensive goods, less cooperation and ultimately dampen global growth.

The dollar has made back some of its early losses although the Dollar Index has spent most of the morning below 100 - trading at 6-week lows. Meanwhile, gold and silver continue to build on gains made from last week. Both metals flew higher following Wednesday’s Fed meeting. The FOMC’s Summary of Economic Projections was viewed as less hawkish than expected, being effectively unchanged from December. The consensus expectation was that the Fed would indicate it was prepared to hike rates by 100 basis points in 2017, up from the 75 indicated at the end of last year.

Stock Index Update

·         Investors cheer “less hawkish” Fed

·         “Hard Data” suggests outlook uncertain

European equities rallied sharply midweek, although they ended Friday’s session mixed. The rally was in response to the strong close on Wall Street on Wednesday night following the culmination of the US Federal Reserve’s two-day meeting. The Fed hiked its key interest rate by 25 basis points. At the same time it released its statement and quarterly Summary of Economic Projections. The interest rate increase was expected as Fed members spent the first part of this month preparing the markets for tighter monetary policy. However, the accompanying statement and Summary (and in particular the FOMC’s “Dot Plot”) were less hawkish than anticipated. Recent comments from Fed members had led investors to believe that the central bank may be prepared to raise rates by 100 basis points over the course of 2017 - up from the 75 basis points-worth of hikes forecast back in December. However, the latest quarterly summary showed there was no material change in the FOMC’s outlook for future rate hikes, inflation, unemployment or growth. Consequently, investors have dialled back on their rate hike assumptions for the rest of the year.

While “soft” sentiment data has continued to pick up since Trump’s election victory in November, the hard data hasn’t. Earlier this month the ISM Manufacturing PMI rose to its highest reading in over 2 years while the corresponding Non-Manufacturing PMI hit a twelve month high. Consumer Confidence is also buoyant. Yet these are all sentiment surveys. In contrast there’s been a string of disappointing hard data releases over the past few weeks including pending home sales, building permits, construction spending, core durable goods, consumer spending, CPI and retail sales. In addition, the Atlanta Fed is now forecasting GDP growth of just 0.9% in the first quarter. To put this in perspective, it was forecasting growth of 1.2% just over a week ago and 3.4% at the end of January. This would suggest that the Federal Reserve has just tightened monetary policy as growth shows signs of weakening.

Commodities Update

·         Crude mixed

·         Gold builds on gains following Fed meeting

Crude was mixed ahead of the weekend following modest gains earlier in the week. The move didn’t appear to be tied to the dollar or the Fed’s more hawkish than expected Summary of Economic Projections. Instead, it looked as if investors were unsure what to do after crude prices steadied following the plunge the week before. Currently, crude’s biggest driver is the supply outlook and US inventories are playing a big part in this. It was an inventory update from the US Department of Energy which triggered the sharp sell-off as it showed an unexpectedly large build in crude stockpiles. The move was exacerbated to some extent by the large long-side speculative positioning which meant fresh buyers were thin on the ground. At the same time, both Brent and WTI had repeatedly failed to break above resistance.  Last week’s update from the Department of Energy showed a drawdown of 200,000 barrels against an expected build of 3.3 million barrels. Despite this, neither WTI nor Brent are out of the danger zone and another piece of negative news has the potential to send prices sharply lower yet again.

Precious metals soared midweek following the release of the FOMC’s rate statement and Summary of Economic Projections. The rally coincided with a sharp sell-off in the US dollar as investors reassessed their projections for further monetary tightening from the Fed over the rest of the year. Ever since the beginning of the month, Fed members have done their best to prepared investors for a rate hike in March. The trouble is that they were so desperate to switch perceptions round for a market which just a few weeks ago saw virtually no chance of tightening this month that it looks like they overdid their hawkish rhetoric. The market began to price in the possibility of four 25 basis point hikes this year, up from three hikes earlier. But the Fed also released its quarterly Summary of Economic Projections. This indicated no material change from December in the FOMC’s forecasts for growth, inflation, unemployment or interest rate changes for the rest of the year. This led to a sharp re-evaluation of the Fed’s rate hike projections in 2017 and a corresponding bounce-back in gold and silver.

Forex Update

·         US dollar takes the brunt of “hawkish” Fed

·         Bank of England keeps rates unchanged

The US dollar was mixed ahead of the weekend although it bounced off lows hit in early trade on Friday. The Dollar Index briefly broke below 100 to hit its lowest level since early February. This followed a sell-off on Wednesday which began straight after the US Federal Reserve announced a 25 basis point rate hike and released its accompanying statement plus quarterly Summary of Economic Projections. These were more hawkish than anticipated as there was no material change in the FOMC’s forecasts over the speed and timing of rate hikes from December’s summary. This surprised investors who were expecting the Fed to signal it was prepared to make a total of four 25 basis point rate hikes in 2017, up from the median prediction of three from last quarter.

Also last week the Bank of England kept rates unchanged at a record low of 0.25%, with on one member out of the nine on the MPC voting in favour of a hike. The decision was widely expected and sterling continued the rally which followed the Fed’s “dovish” summary. Meanwhile, the Bank of Japan kept rates unchanged and the People's Bank of China raised two of its key rates by 10 basis points.

Upcoming events

Today’s significant economic data releases and events include the German Bundesbank’s Monthly Report and a speech from Bundesbank President (and leading member of the ECB’s Governing Council) Jens Weidmann. This afternoon FOMC-voting member Charles Evans will be speaking while later tonight President Trump will speak at a rally in Kentucky.


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Posted by David Morrison

Category: AM Bulletin

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