Incisive market commentary from David Morrison

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GDP data in focus - AM Briefing
28 Apr 2017
ECB round-up and US GDP look-ahead - Video Update
27 Apr 2017
ECB meeting in focus - AM Briefing
27 Apr 2017
ECB's Rate Meeting, a look ahead - Video Update
26 Apr 2017
High hopes for Trump tax cuts - AM Briefing
26 Apr 2017
Global stock indices storm higher - PM Bulletin
25 Apr 2017
Indices mixed after firmer open - AM Briefing
25 Apr 2017
How to use Stop Losses in FX - Trading Guide
24 Apr 2017
French vote sees risk assets soar - AM Briefing
24 Apr 2017
Mixed European open despite Wall Street rally
21 Apr 2017
French Election in focus - Video Update
20 Apr 2017
French election and oil keep investors cautious - AM Briefing
20 Apr 2017
Equities off highs but still show resilience - Video Update
19 Apr 2017
Equities continue to drift lower - AM Bulletin
19 Apr 2017
Sterling soars on early UK election, but France the biggest concern
18 Apr 2017
Europe shrugs off US rally - AM Bulletin
18 Apr 2017
Trump's mouth sends dollar skidding lower - Video Update
13 Apr 2017
Dollar slumps on Trump comments - AM Bulletin
13 Apr 2017
Uncertain outlook ahead of holiday weekend - Video Update
12 Apr 2017
Equities recover after yesterday’s wobble - AM Briefing
12 Apr 2017
USDJPY approaching support - PM Bulletin
11 Apr 2017
Equities drifting in holiday-shortened week - AM Briefing
11 Apr 2017
Look-ahead to Janet Yellen’s speech this evening - PM Bulletin
10 Apr 2017
All eyes on G7 and Yellen - AM Bulletin
10 Apr 2017
US missile attack sends investors into “risk-off” mode - AM Briefing
07 Apr 2017
FOMC minutes rattle investors - Video Update
06 Apr 2017
Stunning reversal greets Fed minutes - AM Briefing
06 Apr 2017
ADP number points to big payroll beat on Friday - Video Update
05 Apr 2017
FOMC minutes in focus - AM Briefing
05 Apr 2017
US indices flag as first quarter ends - PM Bulletin
04 Apr 2017
Disappointing start to the new quarter - AM Briefing
04 Apr 2017
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Geopolitical risk is back on the table after Donald Trump ordered a missile strike on a Syrian airbase last week. There’s certainly been plenty of speculation that, despite campaign rhetoric, Trump may prove to be just as ready to intervene abroad militarily as his predecessor at the White House was.  Yet as far as investors are concerned it seems that last week’s US action was a proportionate and contained response to the apparent use of chemical weapons by the Assad regime. The market reaction to the missile attack has been muted, despite the sabre-rattling from Russia and Iran over the weekend.

Of more immediate concern, and potential market impact, are the actions of the Federal Reserve. The US central bank has now raised rates three times over the past 15 months after adopting an effective zero interest rate policy at the beginning of 2009. While this is certainly monetary tightening, it is happening at a glacial pace. This has helped to reassure investors that the Fed is very aware of the dangers of a policy misstep. It wants to “normalise” rates but it will do everything it can to make sure that its actions don’t lead to a sudden repricing (sell-off) in risk assets.

Now last Wednesday equities soared following a stronger-than-expected US ADP payroll number. This was the third successive month when the actual ADP data came in well ahead of the consensus expectation.  And on the first two of those occasions these big upside surprises foreshadowed similar positive surprises in the government’s official Non-Farm Payroll data which followed (needless to say investors were disappointed when Friday’s payrolls came in well below expectations). Just a few hours after the ADP release, we saw the minutes of the Fed’s meeting in March. The minutes caused quite a stir along with a sudden reversal in equity prices. The Dow went from being up 200 points to closing 40 lower on the day, representing the index’s biggest intra-day swing in over a year. Investors took fright after some Fed members expressed the view that equities looked expensive by some valuation measures. But perhaps more crucially, the US central bank indicated it was prepared to start winding down its $4.5 trillion balance sheet before the year-end. While such a move was hinted at recently by FOMC Vice Chair Bill Dudley, it still took investors by surprise. Most analysts had expected the Fed to concentrate on raising rates further before turning its attention to the balance sheet. The thinking goes that it is best to concentrate on one aspect of monetary tightening at a time. Only a few months back ex-Fed Chair Ben Bernanke said he saw no compelling reason for the central bank to worry about its balance sheet in the near-term. But there were other aspects in the minutes which worried investors. They were also troubled by the suggestion that the Fed would consider winding down both Treasuries and mortgage-backed securities together. The consensus expectation had been that they’d look to reduce mortgages first. Obviously, if the Fed was no longer going to be an indiscriminate buyer of Treasuries, that would remove support and see yields rise.

Then on Friday, the Bill Dudley felt compelled to clarify a comment from the previous week. Mr Dudley had suggested that winding down the balance sheet could result in a “little pause” when it came to the central bank raising its fed funds rate. This led the markets to believe that the balance sheet reduction could, after a fashion, replace rate hikes. This suggested a less aggressive pace of monetary tightening. But in a speech on Friday evening the New York Fed President pointed out that this wasn’t what he meant, and that reducing the balance sheet wouldn’t significantly disrupt the Fed’s rate hike programme. This was a very hawkish statement. And while there was little reaction in equity markets, the dollar soared along with bond yields. Precious metals slumped, with the biggest percentage fall being registered in silver which remains well below $18 per ounce.

So now attention switches to Janet Yellen’s speech at the University of Michigan which will take place after the US equity market close later tonight. There are hopes that she may be prepared to clarify the Fed’s thoughts on the pace and form of monetary tightening. There will be questions from the audience after her speech, so it’s worth bearing in mind that this has the potential to be market-moving in a holiday shortened week.


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Posted by David Morrison

Category: PM Bulletin

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