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BoE expected to hike rates on Thursday - PM Bulletin
31 Oct 2017
Wall Street drifts on tax cut worries - AM Briefing
31 Oct 2017
USDJPY butting up against resistance - PM Bulletin
30 Oct 2017
Spanish IBEX rallies sharply - AM Briefing
30 Oct 2017
Risk appetite strong on earnings/ECB - AM Briefing
27 Oct 2017
ECB finally announces QE taper - PM Bulletin
26 Oct 2017
ECB expected to begin tapering - AM Briefing
26 Oct 2017
Earnings, UK GDP and US Durable Goods ahead - AM Briefing
25 Oct 2017
Earnings season in focus - AM Briefing
24 Oct 2017
Quiet start after record close on Wall Street - AM Briefing
23 Oct 2017
Wall Street reverses early losses-AM Briefing
20 Oct 2017
Equities slide as Catalan deadline approaches - AM Briefing
19 Oct 2017
Gold retesting 50-day moving average - PM Bulletin
18 Oct 2017
Dow surges above 23,000 - AM Briefing
18 Oct 2017
UK inflation data in focus - AM Briefing
17 Oct 2017
Gold and silver break out of downtrend - PM Bulletin
16 Oct 2017
Oil rallies on threat of fresh Iranian sanctions - AM Briefing
16 Oct 2017
US economic data in focus - AM Briefing
13 Oct 2017
FOMC Minutes Released Tonight - Video Update
11 Oct 2017
Spain’s IBEX jumps after Catalan speech - AM Briefing
11 Oct 2017
US dollar - correcting or recovering?
10 Oct 2017
Investors prepare for earnings season - AM Briefing
10 Oct 2017
Has gold broken its long-term downtrend? - PM Bulletin
09 Oct 2017
BoE meeting will decide what sterling does next - Video Update
01 Oct 2017
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Early moves

·         Draghi has to please hawks and doves

·         ECB wants to keep a lid on euro

All eyes are on today’s European Central Bank (ECB) monetary policy meeting. Mario Draghi is expected to announce how the ECB plans to taper its bond purchase programme. The ECB introduced QE in Jan 2015 and the current €60 billion per month bond purchase programme is set to run until the end of this year. The ECB has always said it could be extended and so it will be again.

The consensus is that the ECB will extend QE by nine months until September 2018. However, it is also expected to reduce its bond purchases to €30 billion from the current €60 billion rate. This is a package worth €270 billion and it is hoped that once again it will be open-ended, inasmuch as the ECB holds the right to extend it again as required.

But President Mario Draghi has a tricky task today as he tries to appeal to both hawks and doves within the Euro zone. The doves argue that inflation is still too low, and unemployment too high, to start tightening now. The hawks point out that growth is picking up across the euro zone and further accommodation risks inflating asset bubbles. But Mr Draghi also has to consider the political problems as Spain struggles with Catalonian independence and Italy faces a key General Election early next year. A blow-out in bond yields in the peripheral countries would be a disaster. There’s also a feeling that the ECB is very concerned about a strengthening euro and doesn’t want to see the EURUSD above 1.2000. To this end, it may once again insist that its bond purchases are open-ended and could be extended beyond any cut-off date if deemed necessary.  The euro is stronger in early trade but has pulled back from its best levels.

Stock Index Update

·         Wall Street closes lower

·         Earnings disappoint

There was a mixed start to trading across European stock indices and US stock index futures yesterday morning, but there was a modest positive bias overall. However, equities began to slide soon after the US open and selling gathered place into the European close. The FTSE100 was one of the worst performing indices as it ended the day over 1% lower. Not only did the index get caught up in the general sell-off, but it came under further pressure thanks to a sharp rally in sterling. The British pound shot higher yesterday morning after a stronger-than-expected UK third quarter GDP number boosted speculation that the Bank of England will hike rates at next month’s meeting. Around 75% of FTSE100 earnings come from overseas. So a rise in sterling is seen as having an adverse effect on foreign sales and then reduces earnings when translated back into sterling.

The sell-off across Wall Street gathered pace with both the S&P500 and NASDAQ100 down around 1% by the European close. Boeing was the biggest contributor to the Dow’s decline. Troubled restaurant group Chipotle Mexican Grill and chip maker Advanced Micro Devices topped the loser board with declines of 14.6% and 13.5% respectively. Both companies released third quarter results yesterday. Chipotle missed on both earnings and revenue while Advanced warned of poor sales in the current quarter.

Commodities Update

·         Crude slides on inventory build

·         Precious metals rally on safe haven demand

Yesterday afternoon the Energy Information Administration (EIA) released its latest US oil inventory update. This showed a 900,000 barrel build in crude stockpiles which was way above the 2.6 million barrel drawdown anticipated. However, it was much in line with the numbers reported by the American Petroleum Institute (API) after Tuesday’s close. The API reported a 519,000 barrel increase in crude stockpiles against an expected 3 million barrel drawdown. This kind of deviation from the forecast numbers would normally cause a sell-off in both Brent and WTI. However, both contracts rallied after Tuesday’s close and again yesterday. The EIA and the API both recorded a drawdown in gasoline stockpiles of over 5 million barrels with an expected build in both cases of 1.7 million barrels. On top of this both the EIA and API said distillate inventories had fallen sharply.  But it didn’t take long for prices to reverse direction with both contracts slipping into negative territory 30 minutes after yesterday’s inventory update.

Despite this, crude prices are getting support following comments made on Tuesday by Saudi Arabian Energy Minister Khalid al-Falih. He suggested that there could be some form of extension to the OPEC/non-OPEC production cut agreed just under a year ago. This could come as early as next month at the next official OPEC meeting. Mr al-Falih said this would be part of Saudi Arabia’s plan to reduce oil inventories in industrialized countries to their five-year average. Despite new evidence that global inventory levels are falling and demand is strong, the oil price has struggled to break above $60 a barrel, partly due to uncertainty about what will happen to crude supplies after March, when the deal is due to end.

Gold and silver looked set for another dismal session as prices sold off once again in early trade. However, both metals managed to bounce shortly after the US futures market opened. The two precious metals got a boost as the US dollar suddenly reversed direction and pulled back from earlier highs. However, the reason for the spike was a large buy order in the US gold futures market. Some entity bought up over $2 billion-worth of gold (17,000 futures contracts of 100 ounces each) and this had the short side scrabbling for cover. The purchase saw gold jump over $6 in less than five minutes while silver tacked on 15 cents over the same period. The move demonstrated that eccentric price movements in precious metals aren’t always to the downside. Gold went on to break back above $1,280 and silver topped $17 per ounce. Investors increased their exposure to the two precious metals as US stock indices posted their weakest close since early September.

Forex Update

·         Sterling rallies after GDP release

·         EURUSD steady ahead of ECB

Sterling rallied yesterday morning following the release of UK Preliminary GDP for the third quarter. This rose 0.4% from the second quarter - better than the +0.3% expected. The data took many analysts by surprise as there’s been a concerted attempt to talk down the state of the UK economy in recent months. While GDP is a clumsy, unreliable and backward-looking measure of economic strength, the very fact that it didn’t come in below expectations only raises the probability of a rate hike at next week’s Bank of England (BoE) meeting. CPI inflation in the UK is running at 3% - well above the BoE’s 2% target while the current measure of unemployment is indicating one of the tightest job markets ever. If the MPC keeps rates unchanged next week, Governor Mark Carney is going to have a tough job explaining why he refuses to reverse the Bank’s panicked rate hike in August last year which followed the UK’s referendum decision to leave the EU.

Yesterday the EURUSD was little-changed for most of the session with a slight upside bias. Early on traditional safe-haven currencies such as the Japanese yen and Swiss franc got trounced as investor risk appetite remains elevated.  The USDJPY was pushing up towards 114.50. This level has acted as resistance on a number of occasions this year and a break above here could help convince investors that the greenback has finally broken out to the upside.  But confirmation will come if the Dollar Index can break and hold above 94.00 this week. This will fit into the narrative of the Fed continuing to tighten monetary policy. But much now depends on what happens at today’s ECB meeting. Mario Draghi is expected to announce plans to taper the ECB’s €60 billion per month bond purchase programme. But as far as currency moves are concerned, much will depend on how dovish or otherwise Mr Draghi sounds during his press conference.

Upcoming events

Today’s significant events and economic data releases include the German GfK Consumer Climate survey, Spanish Unemployment, Euro zone M3 Money supply and UK CBI Realised Sales. From the US we have the Goods Trade Balance and Wholesale Inventories. But the main event today is the ECB’s rate decision and ECB President Mario Draghi’s subsequent press conference. 

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Posted by David Morrison

Tagged: ECB GBPUSD EURUSD FTSE DJIA

Category: AM Bulletin


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