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Central banks and US payrolls in focus - Weekly Bulletin
31 Oct 2016
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Equities drift on mixed earnings
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Spread betting charges – overnight financing - Trading Guide
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USD rally continues - Weekly Bulletin
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ECB Decision in less than 400 words - PM Bulletin
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US indices range-bound ahead of election - Video Update
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Brent crude hits 12-month high - AM Buleltin
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Sterling “flash crash” and US Non-Farm Payrolls - AM Bulletin
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Non-Farm Payroll look-ahead - PM Bulletin
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 Monday 24 October 2016

USD rally continues - Weekly Bulletin



Economic Outlook 

Last week’s big events were the third and final debate in the US Presidential Election and the European Central Bank (ECB) meeting. Considering the latter, as expected the ECB held off from making any changes to monetary policy. However, ECB President Mario Draghi refused to be drawn into speculation over the future of the central bank’s bond purchase programme. During his press conference he said that bond purchases could be extended beyond the proposed end-date of March 2017 if necessary, but also made clear that “extraordinary” monetary policy measures couldn’t last forever. It’s worth remembering that little over a month ago there was some speculation that the ECB was planning to taper its bond purchase programme ahead of the March end-date. But Mr Draghi has pushed any decision out to the 8th December meeting. Ultimately, this additional uncertainty has led to a further loss of confidence in the euro with the EURUSD trading at its lowest level since March this year.

Concerning the third and final Presidential Debate, there was a general feeling that Donald Trump hadn’t performed strongly enough to swing undecided voters behind him. There was particular disquiet when he refused to say that he would accept the result if he lost the election. According to the latest poll average compiled by RealClearPolitics, Hillary Clinton continues to hold a lead of over 6%. Breaking this down into individual states and their respective Electoral College votes, RealClearPolitics calculates that Clinton is set to pick up 262 Electoral College votes against Trump’s 170. Most importantly, this leaves Clinton just 8 short of the 270 target for victory with 106 undecided. Sure, Trump could see a late swing, but that’s not what investors believe. It’s not what some bookies believe either. Soon after the debate Paddy Power announced that they were paying out punters who bet on a Clinton win. Of course, pundits point to the UK’s referendum on EU membership to show how badly wrong the polls, bookies, analysts and markets got it wrong.

The ongoing dollar rally on the expectation of a December rate hike from the Fed suggests investors are looking for a Clinton win. Meanwhile, US equity markets continue to struggle with the S&P500 and Dow Jones Industrial Average both close to breaking below the downside of recent ranges at 2,120 and 18,000 respectively. The third quarter earnings season continues to be lacklustre.

This week’s major economic releases include:


JPY Trade Balance, Flash Manufacturing PMI; EUR French, German and Euro zone Flash Manufacturing and Services PMIs, German Buba Monthly Report; GBP CBI Industrial Order Expectations; CNY CB Leading Index; USD FOMC Member Dudley Speaks, FOMC Member Bullard Speaks,Flash Manufacturing PMI


EUR German Ifo Business Climate; USD S&P/CS Composite-20 HPI, CB Consumer Confidence, IBD/TIPP Economic Optimism, Richmond Manufacturing Index; GBP BOE Gov Carney Speaks; EUR ECB President Draghi Speaks


AUD CPI; EUR GfK German Consumer Climate, Italian Retail Sales; GBP BBA Mortgage Approvals; USD Goods Trade Balance, Prelim Wholesale Inventories, Flash Services PMI, New Home Sales, Crude Oil Inventories


AUD Import Prices; CHF UBS Consumption Indicator; EUR Spanish Unemployment Rate, M3 Money Supply; GBP Prelim GDP; USD Durable Goods Orders, Unemployment Claims, Pending Home Sales


JPY Household Spending, Tokyo Core CPI, Unemployment Rate; AUD PPI; EUR French and Spanish CPI and GDP, German CPI; USD Advance GDP, Employment Cost Index, Consumer Sentiment, Inflation Expectations

Equities Outlook

The US corporate earnings season is picking up in pace now. While 182 companies reported last week, this week sees 611 corporate releases. Then next week the season hits its peak when 947 US companies report, with a sharp drop down to 502 for the week ending 11th November.

The season got off to a lacklustre start with a number of big names falling short of analysts’ estimates for both earnings and revenues, or downgrading their guidance. These companies included Alcoa, H&R Block, Campbell Soup, VeriFone, Lululemon, Barnes & Noble, Oracle, Ascena, General Mills and Micron Technology. However, there was some good news from the financial sector with Citigroup, JP Morgan, PNC Financial, Wells Fargo and Goldman Sachs all posting better-than-expected earnings and revenues. Then last week shares in Microsoft hit all-time high after the company reported earnings per share of $0.76 on revenues of $22.33 billion. This was significantly better than the $0.68 and 421.71 billion consensus expectation.

However, the major US stock indices continue to struggle to make headway at the moment. This could be due to nervousness ahead of the US election, together with the prospect of a December rate hike. In this regard it’s worth considering that the stronger dollar could be weighing on sentiment towards US multinationals. Overseas sales could take a hit as US products become less competitive. Also, overseas earnings are less impressive when translated back into dollar equivalents. This could go some way to explaining why the US majors are stuck in the lower band of their six-month trading ranges.

The forward 12-month P/E ratio for the S&P500 is just under 16.5. This is based on an S&P500 level of 2,140 and forward 12-month earnings-per-share estimate of $130. This doesn’t look unduly expensive. However, the current S&P500 12-month earnings per share (inflation adjusted) is running at around $90. Using an S&P level of 2,140 again gives a P/E of 23.8. So, on this basis the index looks quite expensive, unless one is prepared to price in a 44% increase in earnings over the next twelve months.

Deutsche Bank continues to stay in the headlines. At the end of last week the stock was trading at its highest level since 13th September. This was just before the US Department of Justice (DOJ) hit the bank with a $14 billion demand to settle a probe tied to residential mortgage-backed securities. Some investors have expressed concern that the two sides have yet to agree a settlement. Early speculation had been that Deutsche would end up paying a fine of closer to $5 billion. It is obviously in the bank’s interest to agree an acceptable number as soon as possible. However, the delay suggests that Deutsche may be having difficulties in reaching accommodation. At the same time the bank is looking to perform severe cost-cutting measures. Despite all this the shares rallied strongly at the end of last week following a report suggesting the Qatari royal family, along with the Abu Dhabi Sovereign Wealth Fund and Chinese investors were prepared to take part in a capital increase, potentially raising their combined stake to 25%. However, the Zero Hedge blog quickly pointed out that this story has cropped up a few times over the past month, so it would be wise to treat it with some caution.

Commodity/ FX Outlook


At the time of writing, WTI is on course for its fifth consecutive week-on-week rise. The move in Brent hasn’t been quite as consistent, but nevertheless both contracts got a lift in the weeks leading up to and then following the International Energy Forum held in Algeria at the end of September. This was when OPEC members surprised the markets by committing to output cuts. Granted, there was very little in the way of detail. Issues such as which countries would bear the brunt of production cuts and how compliance would be assured were put aside for another day – specifically to be ironed out ahead of and announced after OPEC’s meeting at the end of November. Other questions remain unanswered such as will there be exemptions for countries who have already suffered output disruptions, specifically Iran, Nigeria and Libya? Also will non-OPEC producers (such as Russia) agree to limit production? In addition, it is worth bearing in mind that OPEC said any production cut would be in the region of 240,000 to 740,000 barrels per day (bpd) at a time when OPEC production stood at 33.24 million bpd. Since then production has risen to 33.39 million bpd according to OPEC (Monthly Oil Market report – October 2016) although other sources reckon it could be higher. According to average estimates for global supply and consumption from the US Energy Information Administration (October 2016), total world production for 2016 comes in around 96.04 million barrels per day against total world consumption of 95.33 million bpd. This represents an oversupply of 710,000 bpd in 2016 which is estimated to shrink to 340,000 bpd in 2017. All-in-all, and given record-high global inventories, the proposed OPEC cut (assuming it goes ahead) is, at the lower end, little more than a rounding error.

From a technical perspective, the front-month WTI contract tends to be the one to watch. The interesting thing about this is that it has been unable to break and close convincingly above the highs made back in early June, around $51.60. In contrast, the near-month Brent contract did manage a few breaks and a close above its own June highs (around $52.80). Both contracts subsequently pulled back from these levels. However, it doesn’t look as if the rejection at these areas of resistance is enough to rule out another break-out attempt. The question now is whether there’s still enough upside momentum to push prices higher, particularly as the US dollar continues to strengthen.


The consolidation in gold and silver continued last week. This was quite an impressive performance from the two precious metals given the ongoing rally in the US dollar. Generally, dollar-denominated commodities struggle to make headway when the dollar is rising as it becomes more expensive for non-dollar holders to convert their currencies to make a purchase. On top of this, one of the main reasons for the dollar’s rise is the prospect of a Fed rate hike in December, after the US Presidential Election. Non-interest/dividend paying assets (such as gold and silver) tend to lose their attraction when yields are rising as investors seek out a “risk free” return on their funds. Tied into all this is the market expectation that Hillary Clinton is set to win the election on 8th November. Mrs Clinton is viewed as the “establishment” candidate who will ensure the status quo. And no doubt she will - unless the Democrats win a landslide and capture Congress as well.

So, precious metals are holding up despite a stronger dollar and the prospect of a rate hike. Of course, it could be that investors are staying long of gold and silver as a hedge against a surprise Trump victory. Clinton may have a 7% lead in the polls but everyone will be mindful of how wrong the polls were for recent big events such as the Scottish Referendum, the UK General Election and the UK Referendum. Technically, gold appears to have built good support around $1,250 although it doesn’t yet look ready to launch itself back up towards $1,300. Investors are still nervous of taking on too much exposure to precious metals following the sudden plunge under a month ago. On the downside, a break below $1,240 could see $1,200 become the downside target.


The US dollar continues to rally. On Friday’s close it posted its third week of back-to-back gains. The Dollar Index hit its highest level since the beginning of March, spending most of the week above 98.00. This means that this basket of currencies (euro-dominated but also containing Japanese yen, sterling, Canadian dollars, Swedish krona and Swiss francs) is now resting in the top third sector of a trading range between 94.00 and 100.00 that has been building since March 2015.

In EURUSD terms, the equivalent range is 1.1400 to 1.0800. Last week’s dollar rally saw the EURUSD break below 1.0900 for the first time since early March. This suggests that a test of the 1.0800 support level is possible, although it may prove to be a bit foolhardy to push the dollar much higher ahead of the US Presidential Election. Much of the euro’s fall was down to dollar strength. However, it came under further pressure after ECB President Mario Draghi appeared to back away from talk of the central bank tapering its bond purchase programme. Instead, Mr Draghi said the ECB could extend the programme if necessary although he added that the current “extraordinary” monetary policy couldn’t last forever.

There are a few reasons for the current strength of the US dollar. Most importantly is the growing belief that the US Federal Reserve will raise its headline interest rate before the year-end. According to the CME’s FedWatch Tool (which uses the fed funds futures contract to measure interest rate expectations) the probability of a December rate hike is around 74%. In contrast, the likelihood of a Fed rate hike in November (just one week ahead of the US Presidential Election) stands at just 8%. The other view that’s becoming consensus is that Hillary Clinton will win the election on 8th November. If so, this should smooth the way for the US Federal Reserve to proceed with its gentle pace of monetary tightening. In contrast, a win for Donald Trump could delay a rate hike as it would result in considerable market uncertainty. However, it’s worth remembering Janet Yellen’s speech at the end of last week. In it she mused about running a “high pressure” economy with a tight labour market in order to reverse the negative effects of the financial crisis. This could suggest that she would be happy to see inflation run above the Fed’s 2% target, and for unemployment to slide well below 5% before pulling the trigger on a rate hike. In this she seemed to be talking down expectation of a rate hike this year. An alternative view is that she is preparing the market for a December rate hike, but is making it as clear as she can that further hikes will be few and far between.


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Posted by David Morrison

Category: Weekly Bulletin

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