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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

·         European/US indices turn lower

·         Mixed data from China

European indices and US stock index futures were little-changed first thing this morning. However, all turned a touch lower soon after the European open. Investors appear to be trimming their long-side equity exposure as the second (and final?) deadline for Catalonia to declare its intentions over independence from Spain approaches. Meanwhile, UK Prime Minister Theresa May is in Brussels for the first day of an EU Summit. Brexit seems likely to be the main (only) subject of the two-day meeting. It looks as if negotiations have reached an impasse with both sides still at loggerheads over the Brexit bill. The EU is insisting that this is agreed before other negotiations can take place. The UK position is that there can be no agreement over the bill until certain key areas, such as the scope of a future trade deal, are better understood. This uncertainty is weighing on sterling which is down around 1% against the dollar since the beginning of the week.

On the plus side, the third quarter earnings season is proceeding smoothly and this is currently supporting both European and US stock indices. This all helps as today marks the 30th anniversary of the stock market crash of 1987. But it doesn’t feel as if we’re quite ready to suffer a timely repeat as investors remain in “risk-on” mode.

We had some mixed data out of China overnight. GDP grew at a rate of 6.8% year-on-year, as expected. Industrial Production rose sharply but there was a slip in Fixed Asset Investment.

Yesterday Chinese President Xi Jinping opened the Communist Party Congress, promising to build a "modern socialist country" that will remain open to the world. He also stated that China will continue with market-oriented reforms of its financial system, allowing the market play a decisive role in the allocation of resources. The twice-a-decade meeting continues until 24th October.

Stock Index Update

·         IBM lifts Dow further above 23,000

·         Risk appetite remains high

European stock indices were mixed with a slightly negative tone in early trade yesterday. However, most managed to push higher as the US open approached and futures on the Dow Jones Industrial Average indicated an opening gain of over 100 points or 0.5%. This meant the index surged through 23,000 just 10 weeks after breaching the 22,000 level. The index was boosted by strong third quarter results from IBM which was up close to 7% pre-market. After Tuesday’s close IBM reported earnings per share of $3.30 on revenues of $19.15 billion against expectations of $3.28 and $18.6 billion respectively. The company also said that Cloud revenue was $4.1 billion, up 20% on the quarter. Yet despite IBM’s shift in focus towards Cloud computing, revenues are still declining, having now slipped for the 22nd consecutive quarter.

The better-than-expected numbers and the subsequent share price move had an exaggerated effect on the Dow index as it is price-weighted rather than weighted by market capitalisation as most indices (including the S&P500 and NASDAQ) are.

The third quarter earnings season is shaping up well so far. At least it hasn’t given investors any reason to trim their equity holdings. In fact, risk appetite remains high despite the prospect of monetary tightening from both the US Federal Reserve, European Central Bank and even the Bank of England. The prevailing view is that the removal of stimulus is a consequence of an improvement in the economic outlook. Few investors appear concerned that tighter monetary policy may remove the foundations from under the eight-year Bull Run.

Commodities Update

·         Crude quiet despite inventory decline

·         Precious metals slide again

Crude prices were little-changed yesterday with both WTI and Brent stuck in narrow trading ranges. This was despite the latest update on US inventories from the Energy Information Administration (EIA). Yesterday’s release showed a 5.7 million barrel decline in crude stockpiles against an expected 3.2 million reduction. This was less drastic than the American Petroleum Institute (API) release from Tuesday night which showed a fall of 7.1 million barrels. Offsetting the EIA’s numbers were higher Cushing, distillate and gasoline stocks and overall there the market reaction was subdued, despite numbers showing a sharp decline in US production thanks to Hurricane Nate. This latest storm led to a brief shutdown of around 90% of production in the Gulf of Mexico. Total output for the US came in at 7.9 million barrels per day - a drop if around 1.1 million barrels from the previous week. But despite the quiet session crude continues to get support as Iraqi forces took on Kurdish fighters in the city of Kirkuk. Iraq’s Oil Minister Jabar al-Luaibi wants BP "to quickly make plans to develop the Kirkuk oil fields." Kirkuk is estimated to have around 9 billion barrels of recoverable oil.

Yesterday brought more pain for traders long of gold and silver. Both metals fell further during the session with gold breaking below $1,280 and silver spending most of the day below $17 per ounce. Traders dumped the two precious metals as the dollar extended its countertrend rally. This change around in the dollar’s fortunes has seen the EURUSD lose around 0.8% over the past week. Gold is down close to 2% over the same period while silver has lost over 3% since the beginning of the week. The dollar is firmer on speculation that President Trump is preparing to replace Janet Yellen as Fed Chair with Professor John Taylor of Stanford. It is understood that Professor Taylor is considerably more hawkish in his outlook than Dr Yellen is considered to be. At the same time, the fed funds futures market is suggesting that the probability of a 25 basis point rate hike in December is over 90%.

Forex Update

·         Dollar posts further gains

·         Investors still expect December rate hike

The dollar was firmer again yesterday although it had pulled back from its best levels by the European close. The Dollar Index has risen steadily since this time last week and is up around 3% since early September when it hit its lowest level for close to three years. The dollar’s bounce looks corrective when seen in the context of its sell-off since the beginning of the year. But it could have further to run if US bond yields continue to push higher. According to the CME’s FedWatch Tool there’s more than a 90% chance that the US central bank will raise rates by 25 basis points in December. This is supporting the dollar to some extent. However, there’s still a possibility that the Fed holds off from hiking rates, particularly if inflation as measured by Core PCE continues to fall. It’s worth remembering that the Fed begins reducing its $4.5 trillion balance sheet this month. Members of the FOMC may feel they need more time to assess the impact of this removal of stimulus before tightening monetary policy further. On top of this, there’s talk that the European Central Bank (ECB) is set to taper its bond purchase programme with an announcement coming before the year-end. The current view is that it will extend its bond-buying programme by nine months but reduce the monthly purchases to €30 billion from €60 billion.

Upcoming events

Today’s significant events and economic data releases include UK Retail Sales and an auction of 10-year Spanish bonds. From the US we have Weekly Jobless Claims, the Philly Fed Manufacturing Index and the Conference Board Leading Index.  

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Posted by David Morrison

Category: AM Bulletin


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