Incisive market commentary from David Morrison

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Collapse 2017 <span class='blogcount'>(348)</span>2017 (348)
Collapse November <span class='blogcount'>(26)</span>November (26)
Markets drift ahead of weekend - AM Briefing
24 Nov 2017
US closed for Thanksgiving - AM Briefing
23 Nov 2017
Wall Street hits fresh record highs - AM Briefing
22 Nov 2017
The UK100 and sterling - PM Bulletin
21 Nov 2017
Equities drift in featureless trade - AM Briefing
21 Nov 2017
German coalition talks collapse - AM Briefing
20 Nov 2017
Quiet start after Wall Street surge - AM Briefing
17 Nov 2017
Global stock indices steady - AM Briefing
16 Nov 2017
Is this the start of a stock market correction? - Video Update
15 Nov 2017
Crude sell-off rattles investors - AM Briefing
15 Nov 2017
GBPUSD testing support - PM Bulletin
14 Nov 2017
Central bankers meet in Frankfurt - AM Briefing
14 Nov 2017
Sterling under pressure - AM Briefing
13 Nov 2017
Indices in retreat ahead of weekend - AM Briefing
10 Nov 2017
Could low volatility trigger a market correction? - Video Update
09 Nov 2017
All quiet on the Western Front - AM Briefing
09 Nov 2017
WTI crude surges through resistance - Video Update
08 Nov 2017
Investor inertia sees equities drift - AM Briefing
08 Nov 2017
Crude in demand - PM Bulletin
07 Nov 2017
Fresh record close for Wall Street - AM Briefing
07 Nov 2017
EURUSD shows clear “head and shoulders” - PM Bulletin
06 Nov 2017
Cautious start to trading week - AM Briefing
06 Nov 2017
Traders look ahead to Non-Farm Payrolls - AM Bulletin
03 Nov 2017
Traders look ahead Friday’s US Non-Farm Payrolls - Video Update
02 Nov 2017
BoE expected to raise rates - AM Briefing
02 Nov 2017
Equities soar on US corporate tax cut hopes - AM Briefing
01 Nov 2017
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Expand 2016 <span class='blogcount'>(483)</span>2016 (483)


Early moves

·         German DAX falls 1% in early trade

·         Fresh elections possible

European stock indices were sharply lower ahead of Monday’s open. Traders were responding to news that coalition talks between Germany’s major political parties broke down over the weekend. This means that the country is still without a government and opens up the possibility that a fresh general election will have to be held. The news saw the euro weaken overnight while the German DAX was over 1% lower in early trade. The news also dragged down other European indices. However, most had bounced back sharply soon after the open, although it wasn’t long before they began to drift lower again.

There’s a general feeling that “buying the dip” should still be a profitable strategy. However, there has definitely been a lack of upside momentum in the last few attempts to drive equities up to fresh record highs. This is leading some investors to consider cutting their exposure to equities, at least until the uncertainties over US tax reform are cleared up.  

Stock Index Update

·         Wall Street down for second successive week

·         ECB President delivers upbeat message

European and US stock indices struggled throughout the final session of last week. None of the majors were able to build on Thursday’s bullish surge across Wall Street which saw the NASDAQ Composite close out at a fresh record high. On Friday Treasury Secretary Steven Mnuchin said he expects President Trump to have a Republican tax reform bill on his desk by Christmas. However, the bill being considered by Senate Republicans is fundamentally different from the House Republicans’ bill. This reduces the chances of tax reform before year-end.

On Friday morning the ECB President delivered a speech at the Frankfurt European Banking Congress. Mario Draghi was exceptionally upbeat about the Euro zone economic outlook highlighting data and surveys “pointing to unabated growth momentum in the period ahead.” Despite this he said the central bank needs to be "patient for inflation to return sustainably" when normalizing monetary policy. Back in October the ECB announced that it was extending the life of its Asset Purchase Programme by nine months. The central bank said it would reduce its monthly bond purchases to €30 billion from €60 but reserved the right to extend the programme in duration and size should financial conditions warrant it.

In other news the International Swaps and Derivatives Association (ISDA) announced that Venezuela and its state oil company PDVSA are in default. Venezuelan President Nicolas Maduro has estimated the country's total debt is close to $150 billion although talks have focused on a $60 billion repayment - a stunning development considering that Venezuela is estimated to have the world’s largest oil reserves.

Commodities Update

·         Crude enjoys late rally

·         Tax reform concerns lift precious metals

Crude oil traded in positive territory at the end of last week and this went a long way to make up for the sharp losses suffered on Tuesday. The move looks like little more than a corrective short-covering bounce which accelerated after the European close. Nevertheless Brent ended the week lower while WTI was effectively unchanged, with both contracts still below the multi-year highs hit earlier in the month. Prices came under pressure after the International Energy Agency (IEA) cut its global demand growth outlook by 100,000 barrels per day (bpd) throughout 2017 and 2018. The forecast came in the IEA’s annual World Energy Outlook which also noted that that US crude production has risen to a fresh record high. In other news Norway’s trillion dollar sovereign wealth fund (the world’s largest) is planning to dump around $35 billion of its oil and gas stocks in order to reduce its exposure to the fossil fuel part of the energy sector as the world increasingly looks to renewables. This had no discernible effect on the actual oil price. However, news that TransCanada has shut down part of its Keystone pipeline due to an oil leak also helped to support prices. More importantly, given the crucial OPEC meeting at the end of this month, there are concerns that Russia may not support moves to extend the 1.8 million barrels per day output cut which is due to expire in March 2018. This could put some downside pressure on crude going forward.

Gold had a decent session on Friday, building on gains from earlier in the week and consolidating above $1,280. Silver struggled a bit and spent the session swinging between positive and negative territory. However, both metals surged higher later in the session on renewed fears that US tax reform won’t get through Congress this year. Technically the situation looks broadly positive for both precious metals. As noted last week, the two precious metals have made a succession of higher lows since the last week of October. However, both are currently hemmed in by resistance which comes in around $1,290 for gold and $17.20 for silver. Both metals need to break above these levels convincingly in order to rally into the year-end. That looked like a distinct possibility last week as equity markets sold off and investors appeared to lose their risk appetite, favouring safe havens. However, a sharp bounce-back in equites has helped sentiment improve, for now. So instead traders will be keeping an eye on the dollar as any weakness there should help lift precious metals.

Forex Update

·         Yen rallies on “safe-haven” demand

·         Dollar slips on tax reform concerns

Friday saw the Japanese yen rally sharply against all of the majors. The USDJPY dropped below 113.00 to hit its lowest level in a month and briefly broke below 112.00 in early trade on Monday. Meanwhile the AUDJPY traded below 0.8500 for the first time since June. The yen made gains as investors hedged their bets and headed for “safe haven” currencies. This followed a news report that investigators under US Special Counsel Robert Mueller had subpoenaed President Trump’s election campaign team for documents which may relate to Russian interference in last year’s election. Investors were anxious to reduce their exposure to the dollar, and typically the Japanese yen, along with the Swiss franc, are seen as the safest currencies to own.

The news of the subpoena completely overshadowed Thursday’s vote when the House of Representatives passed a version of the Republican’s tax reform plan. Trump’s dream of pushing through a cut in corporation tax to 20% from 35% has come a step closer. However, the real problem is pushing a tax proposal through the Senate where there is a danger that it will be voted down by Republicans.  On Wednesday Ron Johnson became the first Republican senator to say officially that he would oppose the bill, saying it unfairly favours big corporations at the expense of smaller businesses. Trump can afford to lose the votes of just two Republican senators, and it appears that Jeff Flake, Susan Collins, John McCain and Ted Cruz all have reservations about the proposals.

Upcoming events

Today’s significant events and economic data releases include the German PPI, the German Bundesbank’s Monthly Report, a speech from European Central Bank (ECB) President Mario Draghi and the US CB Leading Index.  


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Posted by David Morrison

Tagged: Oil ECB DAX EURO Germany

Category: AM Bulletin

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