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 Monday 13 November 2017

Sterling under pressure - AM Briefing

 

 

Early moves

·         European indices under pressure

·         Sterling slides on political concerns

European stock indices were firmer in early trade this morning but turned lower soon after the open. The only exception (if you call the UK market “European” anymore) was the FTSE100 which is back in demand thanks to sterling’s weakness. The British pound is taking a beating this morning as investors fret over the stability of the UK government under Theresa May. Commentators continue to doubt whether the Prime Minister can last much longer given Cabinet losses and an apparent loss of confidence within her party. However, others point out that there really is no electable alternative to Mrs May as Tory leader and the Party would be committing electoral suicide by insisting in her removal. In addition, it’s pointed out that Germany is still without a government, Spain is facing its gravest constitutional crisis since the end of Franco while French President Macron’s popularity rating has collapsed faster than an undercooked soufflé. So there’s some additional context when considering Brexit negotiations.

Stock Index Update

·         Wall Street bounces off lows - again

·         JC Penney lifts retailers

Investors exercised some caution ahead of the weekend. Many had been rattled by Thursday’s sudden sell-off which saw the Dow fall over 250 points soon after the European close. There was some relief as traders soon bustled in and bought the dip, just as they have been doing for the past twelve months. However, they were unable to push the US majors back into positive territory and the Dow ended Thursday’s session 100 points lower.

Friday brought further weakness with the S&P500 down around 0.5% ahead of the open. Prices recovered somewhat but only briefly made it back into positive territory ahead of the European close. As far as individual stocks were concerned, there was some mixed news on US earnings. Bricks-and-mortar retail giant JC Penney helped give the sector a long-overdue boost after it reported a bigger-than-expected rise in same-store sales. It also reported a better-than-anticipated quarterly loss of $0.33 per share against a consensus forecast of $0.43 per share. The news helped to lift the share price by over 17% in early trade. On Thursday, retailers Dillards, Kohl’s Nordstrom and Macy’s posted mixed results so bringing some disappointment to an otherwise solid third quarter earnings season.

Commodities Update

·         Oil rally enters 6th month

·         Gold hit by massive sell order

Last week saw crude prices build on gains made since June. This took Brent and WTI up to levels last seen in the summer of 2015 which was when both contracts were crashing in value after hitting multi-year highs above $100 less than twelve months previously. Just under a fortnight ago the WTI contract broke through a significant band of resistance with a top around $54.50. This triggered a fresh wave of buying as short-sellers rushed to cover and new longs established themselves. This has also seen open interest hit fresh highs leading some analysts to warn that a corrective pull-back could be coming. However, when taking a look at a longer-term chart which takes in the highs from 2014, it’s easy to see why a number of traders are suggesting that the oil market rally is just getting started.  Certainly, it looks as if WTI should have little trouble in retesting $60 per barrel. However, that assumes that the oil market hasn’t changed over the past few years, and that may be an incorrect assumption given the flexibility of US shale oil producers to raise output as prices rise. But it’s also worth bearing in mind this month’s OPEC meeting. The expectation is that the OPEC and non-OPEC production cut agreement will be extended from March 2018 to the end of next year. There is also speculation that all sides will raise the output cut above 1.8 million barrels per day. This suggests there’s plenty of scope for disappointment.

Last week was shaping up to be a better one for gold as it managed to push back above $1,280. It was a similar story for silver which looked as if it was happily digging in above $17 per ounce. However, there was a late sell-off on Friday just ahead of the European close. Both metals slumped as an unusually large sell order hit the futures market. Earlier on, both precious metals had been benefitting from the pull-back in the US dollar which lost ground in the latter half of last week. Traders dumped the greenback and tentatively increased their exposure to gold and silver as doubts grew over the likelihood of US tax reform taking place before year-end. This came about as Republican Senators (notably John McCain and Ted Cruz) made it clear that they wouldn’t support Trump’s proposals without amendments. This once again raised fears that the planned reduction in corporation tax to 20% from 35% would be eased in over a number of years. Markets had hoped for (and priced in) a one-off cut within a few months. The dollar suffered another lurch lower on Friday afternoon after US Consumer Confidence dropped to 97.8 against an expected reading of 100.8.

Forex Update

·         US tax reform delayed

·         Sterling rallies despite political woes

Late last week the US dollar came under pressure as it became apparent that the Trump administration’s planned tax reforms would not be in place before the year-end as previously hoped for. Republicans in the Senate released a plan which differs fundamentally from the version being considered by the House of Representatives. In particular, the Senate proposal would lengthen the implementation period for planned cut in corporation tax from 35% to 20% by around two years.

The Dollar Index has repeatedly failed to break back above 95.00. Meanwhile, the EURUSD bounced off 1.1600 on a number of occasions in a move which suggested that the dollar’s rally since early September may be coming to an end. This also saw the USDJPY pull back from resistance around the 114.50 level while sterling also managed to rally. This was despite UK Prime Minister losing two members of her cabinet in the space of a week which led a number of commentators to suggest that Mrs May’s time in office was coming to an end. May’s apparent vulnerability went to make last week’s Brexit negotiations more fraught. Yet sterling rallied, with GBPUSD bouncing off support just under 1.3100 while the EURGBP tested support around the 0.8800 area. Investors now seem less concerned about the stream of accusations of parliamentary sexual abuse with the thinking that the worst is over, at least as far as the Conservative government is concerned.

Upcoming events

Today’s significant events and economic data releases include US Mortgage Delinquencies and Federal Budget Balance.  

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Posted by David Morrison

Tagged: Dollar crudeoil Brexit FTSE Germany

Category: AM Bulletin


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