Incisive market commentary from David Morrison

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Using the RSI in FX - Trading Guide
31 Jul 2017
HSBC share buy-back helps lift indices - AM Briefing
31 Jul 2017
Amazon triggers tech tumble - AM Briefing
28 Jul 2017
Fed reinforces dovish credentials - Video Update
27 Jul 2017
Facebook results boost NASDAQ - AM Briefing
27 Jul 2017
Crude breaks above resistance - PM Bulletin
26 Jul 2017
Equities rally on positive earnings - AM Briefing
26 Jul 2017
Look-ahead to tomorrow’s rate decision from the Fed
25 Jul 2017
Alphabet/Google falls 3% in after-hours trade
25 Jul 2017
Equities start the week on back-foot - AM Briefing
24 Jul 2017
Euro surges on “hawkish” comments from Draghi - AM Briefing
21 Jul 2017
Equities firmer ahead of ECB meeting - AM Briefing
20 Jul 2017
Europe firmer after late US rally - AM Briefing
19 Jul 2017
US Fed turns dovish - PM Bulletin
18 Jul 2017
Dollar slumps on US healthcare gridlock - AM Briefing
18 Jul 2017
Wall Street leads equity rally - AM Briefing
17 Jul 2017
US bank earnings in focus - AM Briefing
14 Jul 2017
Yellen flip-flops to reassure investors - AM Briefing
13 Jul 2017
Oil rallies, but volatility high - Video Update
12 Jul 2017
Yellen to testify in Washington - AM Briefing
12 Jul 2017
A look-ahead to Janet Yellen’s testimony - PM Bulletin
11 Jul 2017
Second quarter earnings in focus - AM Briefing
11 Jul 2017
Jobs data boost sentiment ahead of earnings - AM Briefing
10 Jul 2017
Investors nervous; Non-Farm Payrolls in focus - AM Briefing
07 Jul 2017
Non-Farm Payroll look-ahead - Video Update
06 Jul 2017
Investors shrug off FOMC minutes - AM Briefing
06 Jul 2017
Investors shrug off FOMC minutes - AM Briefing
06 Jul 2017
Look-ahead to FOMC minutes - Video Update
05 Jul 2017
Markets quiet and waiting for fresh guidance from US - AM Briefing
05 Jul 2017
Crude continues to push higher - PM Bulletin
04 Jul 2017
Dow closes at fresh record high - AM Briefing
04 Jul 2017
Positive start to second half of 2017 - AM Briefing
03 Jul 2017
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Early moves

·         Mixed start across markets

·         Earnings for US banks in focus

It’s been a mixed start so far for European stock indices although with an overall positive bias. This follows on from the modest gains made on Wall Street last night which nevertheless propelled the Dow to a fresh record close. The dollar continues to come under pressure and the Dollar Index is hovering around lows from last October, prior to the US presidential election. Crude oil is a touch lower as increased OPEC/non-OPEC output continues to offset large inventory drawdowns in the US.

The second quarter earnings season kicks off properly today with reports from US banking giants Citigroup, JP Morgan, PNC and Wells Fargo. These four banks alone account for around 5% of the S&P500 by market capitalisation, so what happens today is important. One thing to note: going into this quarter, analysts haven’t cut their earnings estimates as aggressively as usual. The consensus earnings-per-share forecast is down around 2% over the last quarter - well below the 3-4% cuts that typically precede each season. This translates into a consensus expectation of 6.7% year-on-year earnings growth on the back of sales growth of 4.6%. This is certainly achievable, but there’s also plenty of scope for disappointment. Investors will also be hoping for some positive forward guidance from corporate executives.

Stock Index Update

·         Equities mixed with slight upside bias

·         Investors ponder Fed’s call on rates

US stock indices closed modestly higher on Thursday, building on sharp gains from the day before. The general feeling is that the Fed is in no hurry to raise rates and the unspoken message is that once again, the central bank is prepared to backstop any downside correction in equity markets.

European indices were mixed to modestly higher for most of yesterday’s session. They struggled to build on Wednesday’s gains even as US equities were a touch firmer overall. Investors were still considering the ramifications of Fed Chair Janet Yellen’s Washington testimony. Investors had piled back into equities after Dr Yellen indicated that the US central bank may not have to raise rates much further to reach a neutral level. This suggested that the Fed may be aiming for fed funds around 2% rather than the 3% level implied by the FOMC’s “Dot Plot” in the Summary of Economic Projections. Dr Yellen also said the Fed was keeping a close eye on inflation.

In this she appeared to be telling investors that the central bank remains data-dependent and will not blindly tighten monetary policy if there’s any deterioration in inflation or the employment situation. This is quite a turnaround from the US central bank which had appeared increasingly hawkish since its last rate meeting back in June. All the signs then were that the Fed would continue to hike irrespective of declining inflation and was looking to take some hot air out of equity markets. Just two weeks ago Dr Yellen and others in FOMC warned that “asset valuations are somewhat rich if you use some traditional metrics like price earnings ratios.” Now it looks as if the US will enjoy low rates for longer. But this does suggest that the Fed has lost some faith in the robustness of the US economy. In fact, it’s really telling us that it doesn’t expect much growth over the next year or so. At some stage investors will realise that Yellen’s testimony is not positive for equities.

Commodities Update

·         WTI/Brent close in on resistance

·         Precious metals struggle

Crude oil pushed higher yesterday afternoon and recovered from an early morning sell-off. Both WTI and Brent have had a few volatile sessions now as traders react to a stack of industry updates and inventory data. The latest US inventory reports have helped to support prices after they showed bigger-than-expected drawdowns in crude and gasoline. But this was offset to some degree after the International Energy agency (IEA) warned that the market could remain oversupplied for some time to come. On Wednesday OPEC reported that oil production rose again last month, driven by increases in Libya and Nigeria, Iraq and Angola.  On top of this Saudi Arabia pumped more than it agreed to last year and the cartel also predicts non-OPEC production growth will grow by 1.14 million barrels a day. OPEC also expects world oil demand growth to slow down slightly next year. Technically the situation is unclear. Both WTI and Brent are approaching mild resistance around $46 and $48.50 respectively. These levels mark the 38.2% Fibonacci Retracements of the May-June sell-off. Breaks above here put resistance around $47 and $49.70 in play.

Gold and silver struggled to make further headway yesterday following the gains made on the back of Janet Yellen’s testimony on Wednesday. Dr Yellen caught traders off guard when she suggested that the key fed funds interest rate may "not have to rise all that much further to get to a neutral policy stance." Ahead of her comments most observers felt that the Fed had a 3% target for rates and that this should be hit sometime in 2020. However, there’s now a feeling that the Fed could be happy to get rates up to 2% or so. On top of this Dr Yellen insisted that the Fed was keeping a close eye on inflation, suggesting that it was still data dependent. Ahead of her testimony many analysts thought that the central bank was prepared to tighten monetary policy irrespective of weak inflationary pressures. But despite this apparent shift back to dovishness, precious metals continue to come under selling pressure.

Forex Update

·         Dovish Yellen keeps pressure on dollar

·         Fed funds neutral rate close to 2%?

It was a fairly featureless session in FX yesterday. The dollar made modest gains versus the euro, Japanese yen and Swiss franc but fell against sterling. But despite this pick-up, and Janet Yellen’s dovish testimony in Washington, investors remain cautious about taking on additional exposure to the greenback. On Wednesday Dr Yellen surprised investors when she said that, “the federal funds rate would not have to rise all that much further to get to a neutral policy stance.” This implied that the neutral policy rate for fed funds could be much lower than the 3% target presumed by investors. This 3% target has appeared repeatedly on the FOMC’s “dot-plot” which shows members’ fed funds forecasts out to 2019 and beyond. The most recent predictions suggest that fed funds would rise from its current 1.0% -1.25% band to hit 3% by 2019/2020 when it would flatten out. Now the feeling is that the Fed’s target is nearer 2%. This shift in assumptions should continue to weigh on the dollar; particularly as the European Central Bank is expected to signal a reduction in monetary stimulus at its meeting in September.

Upcoming events

Today’s significant events and economic data releases include the Italian and Euro zone Trade Balance. From the US we have CPI, Retail Sales, Capacity Utilisation, Industrial Production, Consumer Sentiment, Business Inventories and Inflation Expectations.


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Posted by David Morrison

Category: AM Bulletin

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