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BoE expected to hike rates on Thursday - PM Bulletin
31 Oct 2017
Wall Street drifts on tax cut worries - AM Briefing
31 Oct 2017
USDJPY butting up against resistance - PM Bulletin
30 Oct 2017
Spanish IBEX rallies sharply - AM Briefing
30 Oct 2017
Risk appetite strong on earnings/ECB - AM Briefing
27 Oct 2017
ECB finally announces QE taper - PM Bulletin
26 Oct 2017
ECB expected to begin tapering - AM Briefing
26 Oct 2017
Earnings, UK GDP and US Durable Goods ahead - AM Briefing
25 Oct 2017
Earnings season in focus - AM Briefing
24 Oct 2017
Quiet start after record close on Wall Street - AM Briefing
23 Oct 2017
Wall Street reverses early losses-AM Briefing
20 Oct 2017
Equities slide as Catalan deadline approaches - AM Briefing
19 Oct 2017
Gold retesting 50-day moving average - PM Bulletin
18 Oct 2017
Dow surges above 23,000 - AM Briefing
18 Oct 2017
UK inflation data in focus - AM Briefing
17 Oct 2017
Gold and silver break out of downtrend - PM Bulletin
16 Oct 2017
Oil rallies on threat of fresh Iranian sanctions - AM Briefing
16 Oct 2017
US economic data in focus - AM Briefing
13 Oct 2017
FOMC Minutes Released Tonight - Video Update
11 Oct 2017
Spain’s IBEX jumps after Catalan speech - AM Briefing
11 Oct 2017
US dollar - correcting or recovering?
10 Oct 2017
Investors prepare for earnings season - AM Briefing
10 Oct 2017
Has gold broken its long-term downtrend? - PM Bulletin
09 Oct 2017
BoE meeting will decide what sterling does next - Video Update
01 Oct 2017
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Early moves

·         Europe mixed despite Wall Street rally

·         US inflation data in focus

European stock indices were mixed in early trade on Monday with most little-moved soon after the open. This was despite the S&P500 and NASDAQ soaring to fresh record highs on Friday. The only exception this morning was Spain’s IBEX which was up around 1.7% early on. The index recovered most of Friday’s losses which came after Catalonia declared independence from Spain and as Madrid stripped the region of its autonomy and removed Carles Puigdemont as Catalonia’s regional government leader. The Spanish government is now looking to put in measures to take direct control of Catalonia.

This afternoon brings the release of US Personal Consumption Expenditures (PCE). Core PCE is the Federal Reserve’s preferred inflation measure and it is the annualised data which is key in deciding just how close the Fed is to its 2% inflation target. Core PCE stood at 1.8% in February this year (revised down from 1.9%) suggesting that the inflation in the US economy was on target. This in turn boosted the probability that the US central bank was prepared to tighten monetary policy over the course of 2017. However, this marked the peak for the data series, being the highest reading since July 2012. Since then it has trended down, coming in at just 1.3% in September. If today’s release comes in below 1.3% on an annualised basis, then it reduces the probability of a December rate hike and we should see a pull-back in the US dollar. A reading of 1.3% or above would suggest that inflation could start to inch up towards the Fed’s 2% target, raising the likelihood of a rate hike before the end of the year.

Stock Index Update

·         US GDP surprisingly strong

·         Earnings continue to support equities

On Friday US third quarter GDP came in at +3.0% annualised. This was well above the 2.6% increase expected, and defied concerns that consumer spending and construction activity would take a hit due to summer hurricanes. The news helped stocks and the dollar to add to gains made on Thursday following the ECB’s announcement that it would purchase an additional €270 billion-worth of bonds in the first nine months of next year. US corporate earnings also contributed to overall bullishness as Amazon, Alphabet (Google), Microsoft and Twitter all reported better than expected results. The S&P500, NASDAQ100 and NASDAQ Composite all ended at fresh record highs.

The Spanish IBEX fell sharply on Friday. The index was already in the red as Catalonia's standoff with Madrid following the Catalan vote for independence from Spain reached a critical juncture. Investors expected Madrid to invoke Article 155 of the Spanish constitution. This would authorise direct rule over the region and the dissolution of its government. But before this, the regional parliament of Catalonia voted to declare independence. This was not a complete surprise as on Thursday evening Catalan’s regional president, Carles Puigdemont, ruled out a snap election, effectively dashing hopes of a possible solution to the crisis. Coming on the back of last year’s Brexit vote, the worsening situation in Spain has ramifications for the rest of the EU. Just over a week ago voters in Italy’s two richest regions, Veneto and Lombardy, came out in favour of greater autonomy. This comes ahead of the Italian General Election in March which could see anti-EU/anti -euro parties garner significant support. The Italian FTSE/MIB was the only other European index to close lower on Friday.

President Trump still hasn’t decided who will replace Janet Yellen as Fed Chair. Last week Politico reported that Dr Yellen and Kevin Warsh were both out of the race. Then later on, Bloomberg said that Gary Cohn was also no longer in the running. This meant that Stanford economics professor John Taylor and current member of the Fed Board of Governors Jerome Powell were the only two candidates left. Trump has said he will make his decision before he begins a tour of Asia on 3rd November.

On Thursday the European Central Bank (ECB) announced that it would begin to taper its Asset Purchase Programme (APP) from the beginning of next year. However, the central bank will continue to add stimulus at the rate of €30 billion per month (down from €60 billion currently) through to September 2018. But Mario Draghi made it clear that the ECB’s Governing Council is prepared to increase the programme in both size and duration should financial conditions show signs of weakening. Overall, the ECB was seen as extremely dovish and this helped to weaken the euro and support equities. 

Commodities Update

·         Brent breaks back above $60

·         Precious metals continue to slide

Last week Brent crude hit its highest level since July 2015 and broke back above the key $60 level. The price behaviour for WTI also looks constructive as the contract continues to consolidate above $52. WTI is now closing in on an area of resistance around $54.50 which held throughout the first quarter of this year. This is despite the Brent-WTI premium trading over $6, up from around $1.50 earlier this summer. The premium extended as hurricanes hit key refining areas in Texas, Louisiana and the Gulf of Mexico. So far there’s little suggestion that the premium is set to narrow. Crude oil continues to find support from speculation that the OPEC/non-OPEC production cuts that were agreed last year will be extended, or even expanded when OPEC holds its biannual meeting at the end of next month. Last week Saudi Crown Prince Mohammad bin Salman said he backed an extension to the OPEC-led supply cuts. Earlier this year oil prices were also getting support as US shale production appeared to falter. But it’s possible that the tide has turned again. Last week the Energy Information Administration (EIA) said that US crude production rose 1.1 million barrels per day for the week ended 20th October.

Friday brought more woe for gold and silver bulls. Both precious metals came under further selling pressure as the dollar continued to rally against other majors. Gold failed to hold above $1,280 last week and is now on course to test support around $1,260. A break below here opens up the possibility of a more substantial sell-off. Firstly, it would violate an upward-trending support line that links the December 2016 and July 2017 lows. Secondly, the 21-day Exponential Moving Average (EMA) has already broken below the 55-day EMA and is about to cross below the 100-day EMA. This will be another red flag for the bulls with the danger being that we see some long-side capitulation, particularly if the dollar rally continues. Meanwhile, silver’s position is looking even more precarious with a break below $16.60 raising the possibility of a sharp drop to intermediate support around $16.20.

Forex Update

·         USD consolidating after strong GDP

·         ECB remains accommodative

The US dollar continued to rally into the weekend. On Friday the greenback added to gains made the day before as investors responded positively to a much better-than-expected Preliminary GDP number. US third quarter growth rose 3.0% annualised - way above the 2.6% rate expected. Analysts had downgraded their GDP forecasts in the immediate aftermath of Hurricanes Harvey and Irma, calculating that the storms would cause a brief drop-off in economic activity. However, this wasn’t the case and the concern is now that the Fed may need to hurry up and tighten monetary policy to prevent the US economy overheating. That may seem a bit ridiculous as 3% US growth is hardly stellar when looked at historically. However, in the context of the recovery since the Great Financial Crisis it does suggest that there’s now a chance that inflation may now start to pick up.

The dollar pulled back from its best levels later in the session. This followed rumours that President Trump was leaning towards appointing Jerome Powell as the new Federal Reserve Chairman and successor to Janet Yellen.

The euro slumped on Thursday after the ECB announced that it would extend its Asset Purchase Programme (APP) until September 2018, although at a reduced rate. All this was as expected. However, ECB President Mario Draghi emphasised that the bank reserved the right to increase the APP in either size or duration should this be warranted by financial conditions. This showed that the doves still hold the upper hand at the ECB.

Upcoming events

Today’s significant events and economic data releases include German Retail Sales and Preliminary CPI, Spanish Flash CPI and GDP. From the UK we have Net Lending to Individuals, M4 Money Supply and Mortgage Approvals. From the US we have the Core PCE Price Index, Personal Spending and Personal Income.

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Posted by David Morrison

Tagged: forex crudeoil EURUSD Bullmarket DXY

Category: AM Bulletin


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