Incisive market commentary from David Morrison

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Using the RSI in FX - Trading Guide
31 Jul 2017
HSBC share buy-back helps lift indices - AM Briefing
31 Jul 2017
Amazon triggers tech tumble - AM Briefing
28 Jul 2017
Fed reinforces dovish credentials - Video Update
27 Jul 2017
Facebook results boost NASDAQ - AM Briefing
27 Jul 2017
Crude breaks above resistance - PM Bulletin
26 Jul 2017
Equities rally on positive earnings - AM Briefing
26 Jul 2017
Look-ahead to tomorrow’s rate decision from the Fed
25 Jul 2017
Alphabet/Google falls 3% in after-hours trade
25 Jul 2017
Equities start the week on back-foot - AM Briefing
24 Jul 2017
Euro surges on “hawkish” comments from Draghi - AM Briefing
21 Jul 2017
Equities firmer ahead of ECB meeting - AM Briefing
20 Jul 2017
Europe firmer after late US rally - AM Briefing
19 Jul 2017
US Fed turns dovish - PM Bulletin
18 Jul 2017
Dollar slumps on US healthcare gridlock - AM Briefing
18 Jul 2017
Wall Street leads equity rally - AM Briefing
17 Jul 2017
US bank earnings in focus - AM Briefing
14 Jul 2017
Yellen flip-flops to reassure investors - AM Briefing
13 Jul 2017
Oil rallies, but volatility high - Video Update
12 Jul 2017
Yellen to testify in Washington - AM Briefing
12 Jul 2017
A look-ahead to Janet Yellen’s testimony - PM Bulletin
11 Jul 2017
Second quarter earnings in focus - AM Briefing
11 Jul 2017
Jobs data boost sentiment ahead of earnings - AM Briefing
10 Jul 2017
Investors nervous; Non-Farm Payrolls in focus - AM Briefing
07 Jul 2017
Non-Farm Payroll look-ahead - Video Update
06 Jul 2017
Investors shrug off FOMC minutes - AM Briefing
06 Jul 2017
Investors shrug off FOMC minutes - AM Briefing
06 Jul 2017
Look-ahead to FOMC minutes - Video Update
05 Jul 2017
Markets quiet and waiting for fresh guidance from US - AM Briefing
05 Jul 2017
Crude continues to push higher - PM Bulletin
04 Jul 2017
Dow closes at fresh record high - AM Briefing
04 Jul 2017
Positive start to second half of 2017 - AM Briefing
03 Jul 2017
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Early moves

·         EURUSD close to 2-year high

·         Stock indices mixed in early trade

The euro continued to rally overnight in a move which saw the EURUSD hit its highest level since August 2015. The single currency has soared since January when it hit a 14-year low against the US dollar. Investors have toned down their euphoria following Trump’s election victory in November as his presidency has repeatedly failed to fulfil campaign promises. More recently, the euro has rallied on expectations that the ECB is preparing to wind down its €60 billion per month bond purchase programme. After yesterday’s press conference from ECB President Mario Draghi, investors are convinced that a timetable for reducing stimulus will be announced in September.

Meanwhile, European indices were mixed in early trade this morning following on from an indecisive close on Wall Street last night. Precious metals are firmer while WTI and Brent crude have backed away from resistance around $47 and $49.80 respectively.

Stock Index Update

·         Dow and S&P500 drift while NASDAQ rallied again

·         Trump’s presidency continues to cause concern

After a strong start, the Dow and S&P500 pulled back from their best levels to end a touch lower last night. In contrast the NASDAQ closed in positive territory for the 10th successive session - something last achieved over two years ago. Overall, investors remain upbeat about the second quarter earnings season and this is helping to lift stocks. However, there’s some caution as Trump’s presidency continues to be controversial.

European equities were sharply higher in early trade yesterday as investors reacted to Wednesday night’s rally on Wall Street. This saw the Dow, S&P500, NASDAQ and Russell 2000 all close out at fresh record highs. But while the UK’s FTSE100 managed to hold and even build on its early gains, the other European majors faded into the close. By the end of the session the German DAX, French CAC and Spanish IBEX had all drifted into negative territory.

Yesterday the euro soared during and after ECB President Mario Draghi’s press conference. Mr Draghi sounded dovish as he repeatedly insisted that underlying inflation was well below the ECB’s preferred inflation target. And in an echo of his “whatever it takes” comment from two years ago, Mr Draghi said the ECB was prepared to extend its bond purchase programme in duration and/or size if required. However, traders picked up on his comment that tapering would be considered in detail at the September meeting when the Governing Council would have “all the information by then”. He also said that the pick-up in growth across the Euro zone would lead to higher prices and wages and thereby lift inflation. Traders chose to ignore the fact that a stronger euro and higher bond yields will weigh on inflation.

Commodities Update

·         Crude pulls back from resistance

·         Precious metals hold onto support

Crude oil managed to push higher yesterday afternoon, taking WTI and Brent above resistance around $47 and $49.80 respectively. These two levels mark the 50% retracement of the of the May-June sell-off which followed the last OPEC meeting in Vienna. From a technical standpoint, both contracts stand to make further gains from here if they can hold and consolidate above here until the weekend. If so, then the next levels of resistance come in around $48.20 and $51.00 for WTI and Brent respectively. These mark the 61.8% Fibonacci Retracement of the same move.

From a fundamental perspective there are a number of different factors playing into prices currently. Earlier in the week crude got a lift following news of substantial US inventory drawdowns. Yet despite this, traders appear wary of pushing prices much higher. Global inventories remain near all-time highs while there’s no shortage of supply. US shale oil production continues to rise while the OPEC/non-OPEC output cut agreement appears shaky after Ecuador announced that it will start raising crude production this month. Global demand growth may still be outstripping current supply, but by no means enough to make a serious dent in global inventories.

Gold and silver traded without clear direction yesterday. Both metals drifted a touch in early trade but then posted modest gains soon after the US open. This brief rally appeared to be linked to the sell-off in the US dollar which came in response to the euro’s bounce during ECB President Mario Draghi’s press conference. Consequently, it didn’t take long for the two precious metals to give back their gains as there’s currently a very low negative correlation between precious metals and the dollar. Instead, investors seem more exercised at the prospect of tighter monetary policy from the US Federal Reserve against a backdrop of falling inflation. This is just about the worst possible environment for non-yielding dollar-linked assets like gold and silver as investors dump them in favour of yield-bearing financial instruments. Nevertheless, both metals appear to be consolidating at higher levels having moved off the lows hit at the beginning of last week. There’s a chance of further gains if gold and silver can steady around $1,240 and $16.20 respectively.

Forex Update

·         Euro soars during Draghi press conference

·         Investors convinced that tapering will be announced in September

There was relatively little movement across FX early yesterday as traders sat on their hands ahead of the European Central Bank’s (ECB) statement and Mario Draghi’s subsequent press conference. But the euro fell following the release of ECB statement. There were no surprises in it; all the ECB’s key interest rates were left unchanged. In addition, the ECB said its bond purchase programme would continue to run at €60 billion per month to the end of December, or beyond if necessary. The Governing Council made it clear it wants to see a sustained upside adjustment in inflation towards its target rate, just below 2%. The ECB also said (as in previous statements) that it was prepared to extend its bond purchases in size and/or duration if required. So there was no mention of tapering.

But the euro subsequently soared as Mario Draghi began his press conference and the EURUSD went on to hit its highest level since August 2015. This was despite the fact that Mr Draghi insisted that tapering had not been discussed and that underlying inflation showed no signs of picking up. Instead he said that the Governing Council would consider tapering at the autumn meeting when they would have “all the information by then”. Traders seemed to take this as a green light for the ECB to begin winding down its bond purchases next year. Draghi also said continued economic growth should lift prices and wages and so boost inflation. However, the market’s response of higher yields and a stronger euro could end up dampening inflation further. Time will tell, but I’m not convinced Draghi was being hawkish at all.

Upcoming events

Today’s significant events and economic data releases include the UK’s Public Sector Borrowing Requirement, Canadian CPI and Retail Sales.


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Posted by David Morrison

Category: AM Bulletin

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