NEWS AND ANALYSIS

Incisive market commentary from David Morrison

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Early moves

·         IBEX opens 2% higher

·         Investors look ahead to FOMC minutes

It’s been another mixed start for the European majors this morning. Looking at the positives, the Spanish IBEX was up over 2% on the open as investors responded to Catalonia’s delay in implementing independence from Spain. However, it is still unclear if Madrid will continue with its aggressive and uncompromising attitude towards the breakaway Spanish region, or if it will now sit down and try to negotiate a workable deal.

But other European indices were little-changed, despite last night’s fresh record close on the Dow, while US stock index futures were all a touch softer in early trade. There’s no significant economic data due out today. However, tonight sees the release of minutes from last month’s Federal Reserve meeting and these could prove to be highly significant. The Fed was viewed as being unexpectedly hawkish in September, although a closer read of their projections and Janet Yellen’s accompanying press conference gave a more nuanced tone. If tonight’s minutes suggest any hints of dovishness from the FOMC then expectations of a December rate hike will be revised down sharply.

Stock Index Update

·         Wal-Mart buy-back boosts Dow

·         Catalonian independence confirmed but delayed

All the US majors finished higher yesterday with the Dow closing out at a fresh record high. Wal-Mart was the driving force behind the move after the retail giant announced a $20 billion buy-back. But investors were also cheering the news that Honeywell was planning to split the company into two while Pfizer was considering spinning off part of its business. All these shenanigans help to foster investor interest and keep stocks bubbling higher - even if they do absolutely nothing in terms of adding to overall productivity and growth.

European stock indices struggled again yesterday as investors trimmed their exposure ahead of a speech from Carles Puigdemont, President of the Catalan Government. He was expected to declare independence from Spain in a speech scheduled to be delivered after the European close. This follows the controversial referendum on 1st October which led to an overwhelming vote in favour of Catalonian independence but on a very low turnout. The Spanish government insists that the vote was illegal, and threatened Mr Puigdemont with imprisonment if he went ahead with the declaration. After a delay of some hours, Mr Puigdemont announced that a declaration of independence had been signed by Catalonian regional leaders but that implementation would be delayed for some weeks so that talks could take place with Madrid. He also said he wanted to “de-escalate” the tensions although that could be difficult given the Spanish government’s hard-line stance. It could be that Madrid refuses any negotiations whatsoever.

Commodities Update

·         Crude shoots higher

·         Gold and silver extend gains

Brent and WTI shot higher yesterday. The move saw WTI push back further above $50 per barrel while Brent traded comfortably above $56. The rally came as it was reported that Saudi Arabia has cut its export allocations for November by 560,000 barrels per day - in line with the production cut quotas agreed last November. This helps to offset last week’s news that OPEC output has increased recently. Also adding to the overall bullishness were comments from OPEC secretary general Mohammad Barkindo. On Monday he stated that it was apparent that the global oil market was rebalancing after years of oversupply. He pointed to drawdowns in onshore and offshore crude stockpiles which suggest that the OPEC/non-OPEC production cut agreement may finally be having some effect. The agreement is set to expire in March next year although there is speculation that it will be extended for a second time.

Gold and silver put in another solid performance yesterday, lifting in no small measure by the ongoing sell-off in the US dollar. A weaker dollar makes it cheaper for non-dollar holders to purchase dollar-denominated assets and this can often trigger buying interest in gold and silver. There was also some chatter that investors were buying the two precious metals as safe-haven plays against the possibility of another North Korean missile launch. This may be the case, but it does seem as if the summer’s crisis on the Korean peninsula has died down to some extent. South Korea has repeatedly made it clear that it will not support military action against its neighbour and is prepared to put up with North Korea with nukes. Instead, yesterday’s rally in precious metals looks as if it was driven by investors taking advantage of the recent sell-off which has seen gold and silver pull back sharply from recent highs.

Forex Update

·         US dollar continues to slide

·         Sterling rallies on strong data

The US dollar fell again yesterday and this is leading many traders to wonder if the greenback’s recent rally has come to an end. The sell-off was partly down to euro strength as investors responded to an unexpected pick-up in Germany’s Trade Balance. There was also a feeling that Catalonia was unlikely to formally declare independence from Spain while the ECB is expected to detail plans to taper its bond purchase programme later this month.

Sterling continued to strengthen yesterday and got a lift after the release of some better-than-expected UK data. Manufacturing Production rose 0.4% rose 0.4% month-on-month, comfortably above the +0.2% expected. Construction Output was also strong while Industrial Production was in line with the consensus expectation. The news helped to lift the GDPUSD back above 1.3200, helping cable to make back some of its losses made since 20th September when it traded at its best level since the UK voted to leave the EU back in June last year. Investors have shied away from the British pound as Brexit talks soured and after Theresa May’s disastrous performance at last week’ Tory Party conference. However, sterling is finding support as investors price in the possibility of a 25 basis point rate hike at next month’s Bank of England meeting.

Upcoming events

Today’s significant events and economic data releases include US JOLTS Job Openings and minutes from last month’s FOMC meeting.  

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Posted by David Morrison

Tagged: AM Bulletin briefing

Category: AM Bulletin


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