Incisive market commentary from David Morrison

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Non-Farm Payroll look-ahead - Video Update
31 Aug 2017
Tech stocks lead market recovery - AM Briefing
31 Aug 2017
Fall-out from Jackson Hole - Video Update
30 Aug 2017
Investors shrug off North Korean missile launch - AM Briefing
30 Aug 2017
Gold breaks through $1,300 - PM Bulletin
29 Aug 2017
Equities slide after North Korean missile launch - AM Briefing
29 Aug 2017
Yellen and Draghi in focus - AM Briefing
25 Aug 2017
Jackson Hole look-ahead to key speeches - Video Update
23 Aug 2017
Wall Street surges on tax reform hopes - AM Briefing
23 Aug 2017
Euro slips, but range-bound ahead of Jackson Hole - PM Bulletin
22 Aug 2017
Equities recover in early trade - AM Briefing
22 Aug 2017
Equities under pressure as Trump struggles - AM Briefing
21 Aug 2017
Equities fall as investors find reasons to sell - AM Briefing
18 Aug 2017
ECB and FOMC minutes lead to FX volatility
17 Aug 2017
FOMC minutes viewed as dovish - AM Briefing
17 Aug 2017
FOMC minutes in focus - Video Update
16 Aug 2017
Fed minutes in focus - AM Briefing
16 Aug 2017
Sterling slips as inflation steadies - PM Bulletin
15 Aug 2017
Equities continue to recover - AM Briefing
15 Aug 2017
Gold: triple top or third time lucky? - PM Bulletin
14 Aug 2017
Stocks bounce as geopolitical risk eases - AM Briefing
14 Aug 2017
Bank of England rate decision in focus - AM Briefing
03 Aug 2017
Crude breaks above resistance - PM Bulletin
02 Aug 2017
Apple rallies 6% on strong report - AM Briefing
02 Aug 2017
Cable breaks above 1.32000 - PM Bulletin
01 Aug 2017
Apple to report after the close - AM Briefing
01 Aug 2017
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 Wednesday 16 August 2017

Fed minutes in focus - AM Briefing



Early moves

·         European indices rally after quiet open

·         Fed minutes and UK employment data ahead

There was a quiet start to trade this morning as Europe contemplated last night’s flat close across Wall Street. US markets pulled back from their best levels after a slew of disappointing second quarter results from retailers. However, things perked up soon after the open with all the European major indices now firmly in positive territory.

This morning sees the release of UK employment data. All eyes will be on sterling after yesterday’s tumble on weaker-than-expected inflation numbers. The British pound is currently trading at 10-month low s against the euro. Later today we have US Building Permits, Housing Starts, Crude Oil Inventories and minutes from the Fed’s last meeting back in July.

Yesterday brought the release of some better-than-expected US economic data. Both Core and Headline Retail Sales came in comfortably above expectations and last month’s readings. Meanwhile, the Empire State Manufacturing Index soared to 25.2 from 9.8 previously - miles above the 10.1 consensus expectation. While the news had little positive effect on equity market, it helped to lift the US dollar while keeping the downside pressure on precious metals. There’s a growing feeling that the US central bank is prepared to tighten monetary policy further this year, even though inflation remains well below target.

Stock Index Update

·         Mixed close across the majors

·         Geopolitical tensions subside

There was a mixed close across Wall Street and Europe yesterday as the majors all pulled back from early highs. The Dow and the S&P500 both ended the session effectively unchanged, weighed down by disappointing second quarter results from the retail sector. Most of the European indices ended lower on the day, although both the UK’s FTSE100 and French CAC eked out modest gains.

Last week markets went into a blind funk. At least that’s how it seemed on Thursday. However, a quick look at the chart of the S&P500 shows us that the downside move has essentially been reversed. And one can’t help thinking that after another few days of data last week’s move will be barely noticeable on the chart. So while last Thursday’s sell-off was the biggest one-day move for a number of months, it didn’t develop into anything substantial. In fact, when one considers that there was talk of a nuclear confrontation between two somewhat eccentric heads of state the market response was somewhat restrained. Yet seen another way, a sudden sell-off on the back of a couple of tweets from a well-known blowhard aimed at one of the poorest countries in the world, and things seem a bit different. Perhaps the main takeaway from all this is that once again the dip-buyers have triumphed. The sharp sell-off failed to follow through to anything substantial and the bull market remains intact. Yet despite this concerns remain. With the bull market now in its eighth year and valuations stretched, more and more analysts are quoting Minsky’s dictum that: “stability breeds instability.”

Commodities Update

·         API records large crude drawdown

·         Precious metals continue to slide

Last night the American Petroleum Institute (API) released its latest update on US inventories. This showed a 9.2 million barrel drawdown in crude stockpiles - way above the 427,000 draw expected and also the biggest reduction since September 2016. Distillate stockpiles also fell more than expected although these draws were offset to some extent by builds in gasoline and at the Cushing, Oklahoma hub. The news saw oil prices rise modestly with WTI briefly topping $48.

Crude oil came under selling pressure for most of yesterday’s session. The losses followed on from Monday’s steep fall which was triggered by the news that Chinese refining activity in July dropped by the biggest amount in three years. This suggested that demand for crude may be declining in the world’s second largest economy by GDP. But there are other factors weighing on the oil price, not least the fact that OPEC production has picked up sharply, mainly as a result of a sharp jump in output from Libya. It’s worth remembering that Libya, along with Nigeria, were the two countries exempted from the OPEC/non-OPEC production cut agreement reached back in November. Since then Nigeria has agreed to cap production to 1.8 million barrels per day, which is close to the 1.7 million it’s already producing. On Monday WTI broke down below $48 triggering sell stops which took prices lower again.

Gold fell below $1,280 yesterday in a move that scared out many of the longs who rushed to load up on precious metals throughout last week. But the sell-off in silver was more extreme with the metal down over 2.5% at one stage. This saw silver crash below $16.80 in a move that saw stops triggered taking the metal down briefly below $16.60. Investors felt there was less reason to hold precious metals as safe havens as tensions eased between the US and North Korea. Last week President Trump responded with a couple of aggressive tweets to North Korea’s announcement that it was planning to fire four missiles towards the US Pacific territory of Guam. But yesterday it appeared that the North Koreans were backing away from the threat and this helped to diffuse a tense situation. The two precious metals also suffered from comments made by FOMC member William Dudley. Mr Dudley suggested that the Fed was prepared to tighten monetary policy further in 2017.

Forex Update

·         Dollar lifted by decent data

·         Sterling hits 10 month low against euro

The US dollar was higher against all the majors in early trade yesterday. It was helped along by a clutch of better-than-expected US economic numbers including retail sales, business inventories and the Empire State Manufacturing Index. On Monday the dollar got a lift on comments from New York Federal Reserve President William Dudley. The voting FOMC member said it was perfectly reasonable for the Fed to hike rates again this year and start to trim its balance sheet. This suggests that the Fed is less worried about tepid inflation than previously thought. 

Meanwhile sterling fell sharply following the release of UK inflation data for July. Headline CPI (which includes food and energy) was unchanged from June coming in at +2.6% annualised against an expectation of +2.7%. Core CPI was also unchanged from the prior month and came in at +2.4% on expectations of a 2.5% increase. Both numbers suggest that inflation may have peaked back in May when Headline CPI hit 2.9% - nearly 1% above the Bank of England’s 2% target. The news takes the pressure off the Bank’s MPC to raise rates and makes it less likely that other MPC members will join Ian McCafferty and Michael Saunders who both voted for a 25 basis point rate hike earlier this month. The probability of a rate hike before the end of 2017 fell below 23% after the release, compared with just under 50% for US fed funds.

Meanwhile, sterling hit its lowest level against the euro since October 2016. While there’s an element of uncertainty about how the UK will fare in the ongoing Brexit negotiations, the overriding driver for the euro’s rally since mid-April has been a general expectation that the European Central Bank (ECB) will soon announce plans to reduce its €60 billion per month bond purchase programme. There could be more news on this later this month when ECB President Mario Draghi addresses delegates at the Jackson Hole Economic Symposium.

Upcoming events

Today’s significant events and economic data releases include the UK Unemployment Rate, Average Earnings Index and Claimant Count Change. We also have an update on second quarter Euro zone GDP while from the US we have Building Permits, Housing Starts, Crude Oil Inventories and minutes from the FOMC meeting at the end of July.


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Posted by David Morrison

Category: AM Bulletin

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