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Collapse 2017 <span class='blogcount'>(348)</span>2017 (348)
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Investors on edge after Wall Street sell-off
30 Jun 2017
Central bankers keep traders guessing - Video Update
29 Jun 2017
Markets mixed ahead of weekend - AM Briefing
23 Jun 2017
Investors concerned over oil sell-off - AM Briefing
22 Jun 2017
Crude oil hits seven-month low - Video Update
21 Jun 2017
Sell-off in crude weighs on equities - AM Briefing
21 Jun 2017
Crude falls back to November lows - PM Bulletin
20 Jun 2017
Fresh records for US indices - AM Briefing
20 Jun 2017
Equity rally resumes - AM Briefing
19 Jun 2017
Markets steady ahead of weekend - AM Briefing
16 Jun 2017
FOMC surprises with “hawkish rate hike” - Video Update
15 Jun 2017
Fed unveils “hawkish rate hike” - AM Briefing
15 Jun 2017
FOMC rate decision in focus - Video Update
14 Jun 2017
Investors expect another Fed rate hike - AM Briefing
14 Jun 2017
FOMC look-ahead - PM Bulletin
13 Jun 2017
NASDAQ futures recover in early trade - AM Briefing
13 Jun 2017
Equities slide after US tech sell-off - AM Briefing
12 Jun 2017
May-hem! Tories chuck away majority - AM Briefing
09 Jun 2017
Brief notes on gold - PM Bulletin
08 Jun 2017
Markets calm as investors take “Risky Thursday” in their stride
08 Jun 2017
Markets becalmed ahead of “Risky Thursday” - AM Briefing
07 Jun 2017
Sterling, events on Thursday and the UK election
06 Jun 2017
Safe havens in demand - AM Briefing
06 Jun 2017
Trading Guides - How CFD trading works
05 Jun 2017
Sterling steady after terror attack - AM Briefing
05 Jun 2017
Non-Farm Payrolls in focus - AM briefing
02 Jun 2017
Non-Farm Payroll look-ahead - Video Update
01 Jun 2017
Crude bounces after US inventory data - AM Briefing
01 Jun 2017
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Expand 2016 <span class='blogcount'>(483)</span>2016 (483)


Early moves

·         Mixed start as quarter comes to a close

·         Tech stocks lead US markets lower

It’s been a mixed start to the final session of a quarter which also marks the end of the first half of the year. There’s a slight edge to today’s trade as investors consider last night’s sell-off on Wall Street. This saw the tech sector lead a decline across the broader market although the banking sector managed to post gains following positive results from the latest Federal Reserve stress tests. However, it’s worth noting that the major US indices bounced off their lows.

The big question now is whether we can expect a bigger pull-back for the rest of the summer, or if we’ve already seen the worst of the sell-off. The optimists believe that the pull-back is little more than sector rotation as investors book profits on their favourite tech stocks and reinvest the proceeds in other sectors. But the bears believe that the market is just starting to adjust to the prospect of tighter monetary policy.

On that score we have some important inflation updates today starting with Euro zone Flash CPI. Later on from the US we have the Core PCE Price Index. This is the Federal Reserve’s preferred inflation measure. If either of these numbers indicates that inflation is trending lower, then investors will wind down their expectations for future rate rises. It’s also worth bearing in mind that this will be a long holiday weekend as the US prepares for Independence Day on 4th July.

Stock Index Update

·         US indices weaker ahead of quarter-end

·         Investors also concerned rising rates

The major US stock indices all closed sharply lower last night led by tech stocks. The tech-heavy NASDAQ ended off 1.4% while the broader-based S&P500 finished down 0.8%. However, all the indices rebounded off their lows which were hit a few hours before the close. Most commentators linked the moves to end-of-quarter position squaring together with some rotation. The banking sector was broadly higher following positive Fed stress test results. However, it could be that there’s also some nervousness at the prospect of the ECB and Bank of England joining the Fed in tightening monetary policy.

Bond yields continued to push higher following remarks from European Central Bank (ECB) President Mario Draghi earlier in the week. On Tuesday Mr Draghi sent the euro higher and bonds lower after he said that the ECB should be "prudent" when "gradually" updating its monetary policy. This was taken to mean that the ECB is preparing to taper its bond purchase programme. However, sources were quick to claim that Mr Draghi had been misinterpreted and the ECB was not yet ready to consider a reduction in monetary stimulus. Despite this the overall expectation is that tapering will start in early 2018, this is contributing to euro strength.

The Federal Reserve Chair Janet Yellen also spoke earlier this week. She made a couple of interesting comments, the first of which touched on stock market valuations. “Asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates.” Comments about price/earnings ratios should really be outside the remit of the Fed Chair. She went on to say: “Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will.”

Commodities Update

·         Crude continues to recover

·         Gold and silver ignore dollar weakness

Crude oil rallied again yesterday to post its sixth successive positive session. There’s been some evidence of short-covering and profit-taking as both WTI and Brent appeared heavily oversold. The buying continued this week helped along by news of a modest rise in US crude inventories. This means that both Brent and WTI are up around 8% each from the lows hit just over a week ago.

As far as the front month WTI contract was concerned, the recent sell-off took crude down to its lowest level in close to a year. Crude came under selling pressure right after the last OPEC meeting which took place less than a month ago. Back then it became abundantly clear then that there was no appetite from OPEC and non-OPEC members for increasing the daily output cut beyond 1.8 million barrels. All sides would now need to call an emergency meeting if they were serious about addressing the current decline. But for now it looks as if there’s a technical bounce in progress. Chart-wise, there’s some resistance for WTI around $46. This marks the 38.2% Fibonacci Retracement of the May/June sell-off. The corresponding level for Brent is around $48.50.

Gold and silver were under pressure for all of yesterday’s session. This was a disappointment for those traders who are used to seeing the two metals correlate inversely with the dollar. Yesterday the Dollar Index hit its lowest level since May 2016. Yet both precious metals have pulled back sharply since the beginning of June. Despite this, gold is up around 7% since the start of this year while silver has tacked on close to 5%. Yet the dollar has lost over 10% against the euro since early January when it hit a fourteen year high. It’s difficult to pinpoint why there’s currently little appetite for precious metals, particularly in dollar terms. After all, the recent pull-back in US tech stocks should give investors some cause for concern which typically leads to asset diversification. However, gold can struggle in a low inflation environment when rates are on the rise.

Forex Update

·         Dollar continues to slide

·         Euro and sterling gain after central bank comments

Yesterday the Dollar Index fell below 95.40 to hit its lowest level since beginning of Oct 2016. At the same time the EURUSD broke above 1.1400 and made a 14 month high. Sterling was also back in the news, at least against the dollar as it retested resistance around the 1.3000 level. Most of this week’s movement in FX has been due to central bank chatter.

As far as sterling was concerned, we had a surprise two weeks ago at the Bank of England rate setting meeting vote. The 3-5 vote in favour of keeping rates on hold suggested the MPC was much closer to hiking rates than previously considered. Then just one week later Governor Carney insisted that it was too soon to raise rates. He used his Mansion House speech to warn over mixed economic signals and Brexit. But a few days ago he talked about debating an increase in interest rates "in the coming months”, particularly if business owners looked through Brexit uncertainties and increased investment.

On Tuesday European Central Bank (ECB) President Mario Draghi sent the euro higher and bonds lower after he said that the ECB should be "prudent" when "gradually" updating its monetary policy. This was taken to mean that the ECB is preparing to taper its stimulus. However, sources were quick to claim that Mr Draghi had been misinterpreted and the ECB was not yet ready to consider a reduction in its monetary stimulus. Despite this the overall expectation is that tapering will start in early 2018, this is contributing to euro strength.

Also two weeks ago the Fed came up with a hawkish rate hike. The FOMC increased rates by 25 bps as expected, but also upped the ante by forecasting an additional hike and some balance sheet reduction before year-end.  Since then, a number of Fed members have signalled their determination to tighten monetary policy. However, it feels as if investors aren’t yet convinced. Instead they expect the Fed to pause in September while the ECB and maybe even the BoE lay the foundation for tighter monetary policy.

Upcoming events

Today’s significant events and economic data releases include the Swiss KOF Economic Barometer, German Unemployment and Euro zone Flash CPI. From the UK we have the Current Account, Final GDP and Index of Services. From the US we have the Core PCE Price Index, Personal Spending, Personal Income, Chicago PMI, Consumer Sentiment and Inflation Expectations.


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Posted by David Morrison

Category: AM Bulletin

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