Incisive market commentary from David Morrison

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Non-Farm Payroll look-ahead - Video Update
31 Aug 2017
Tech stocks lead market recovery - AM Briefing
31 Aug 2017
Fall-out from Jackson Hole - Video Update
30 Aug 2017
Investors shrug off North Korean missile launch - AM Briefing
30 Aug 2017
Gold breaks through $1,300 - PM Bulletin
29 Aug 2017
Equities slide after North Korean missile launch - AM Briefing
29 Aug 2017
Yellen and Draghi in focus - AM Briefing
25 Aug 2017
Jackson Hole look-ahead to key speeches - Video Update
23 Aug 2017
Wall Street surges on tax reform hopes - AM Briefing
23 Aug 2017
Euro slips, but range-bound ahead of Jackson Hole - PM Bulletin
22 Aug 2017
Equities recover in early trade - AM Briefing
22 Aug 2017
Equities under pressure as Trump struggles - AM Briefing
21 Aug 2017
Equities fall as investors find reasons to sell - AM Briefing
18 Aug 2017
ECB and FOMC minutes lead to FX volatility
17 Aug 2017
FOMC minutes viewed as dovish - AM Briefing
17 Aug 2017
FOMC minutes in focus - Video Update
16 Aug 2017
Fed minutes in focus - AM Briefing
16 Aug 2017
Sterling slips as inflation steadies - PM Bulletin
15 Aug 2017
Equities continue to recover - AM Briefing
15 Aug 2017
Gold: triple top or third time lucky? - PM Bulletin
14 Aug 2017
Stocks bounce as geopolitical risk eases - AM Briefing
14 Aug 2017
Bank of England rate decision in focus - AM Briefing
03 Aug 2017
Crude breaks above resistance - PM Bulletin
02 Aug 2017
Apple rallies 6% on strong report - AM Briefing
02 Aug 2017
Cable breaks above 1.32000 - PM Bulletin
01 Aug 2017
Apple to report after the close - AM Briefing
01 Aug 2017
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Early moves

·         US indices in low volume melt-up

·         European equities off to a slow start

It’s been a mixed start for European stock indices with a slightly negative bias on the open. This was something of a surprise given last night’s sharp rally on Wall Street which saw all the US majors close out near their respective highs. However, yesterday’s move was on relatively low volumes and took place against a holiday back-drop. It’s also worth noting that gold and silver held up quite well suggesting that while traders may be happy to buy dips, investors aren’t yet ready to go back fully into “risk-on” mode. Certainly, the explanation for the rally (that there’s been a breakthrough on US tax reform) isn’t particularly convincing as such efforts have unwound rapidly in the past. And President Trump hasn’t exactly managed to build bridges with those policymakers he alienated after his comments concerning the violence in Charlottesville. The overriding concern is that he will continue to struggle to fulfil his election promises on tax cuts, regulatory reform and infrastructure spending.

Stock Index Update

·         Wall Street surges

·         Major indices melt-up on low volume

There was a firmer tone across European and US stock index futures in early trade yesterday and that carried on throughout yesterday’s session. The Dow was up close to 200 points by the close to record its best day since April. There was little sign of the nervousness and skittishness which had afflicted investors over the past ten days or so. This was despite two sharp sell-offs on successive Thursdays that shook market participants out of the low-volatility complacency that has affected equity markets since last November. On Monday the major US stock indices had rallied off their lows to end near their respective highs. This supports the long-held belief that yet again any sell-off should be used as a dip-buying opportunity. Of course, this is a tactic that has worked so well for so long that there’s little reason not to try it again. The trouble is that there will come a time when it doesn’t work anymore and the subsequent market reaction could be more severe than anything we’ve seen for many years. But the prevailing wisdom is that the world’s central banks have investors’ best interests at heart and will quickly step in to prevent any significant sell-off. However, the Fed has been tightening monetary policy since December 2015 (at a glacial rate) while there’s speculation that the ECB is planning to reduce its bond buying programme early next year. Consequently, this will mean there’s considerably less monetary stimulus flowing into markets, signalling a fundamental change in the way we’ve been doing business for the past eight years.

Commodities Update

·         Crude oil drifts lower on API release

·         Precious metals prove resilient

After last night’s close the American Petroleum Institute (API) released its latest update on US crude oil inventories. There was a headline drawdown in crude of 3.6 million barrels, just a touch below the 3.5 million expected. There was also a bigger-than-expected reduction at the Cushing, Oklahoma hub, although all this was offset by significant builds in gasoline and distillates. The news has kept a lid on crude prices this morning.

Crude has been particularly volatile over the last couple of days. WTI and Brent fell around 3% on Monday afternoon, giving back most of the gains made after the European close on Friday. And ion the same way that there was little good reason for last week’s sudden rally, it was difficult to fathom why prices should have pulled back so rapidly on Monday. In both cases it appears that traders rushed to close positions and triggered stops which exacerbated the overall movement. This suggests that the market is currently being dominated by short-term speculators in a low-liquidity environment. This makes sense as we’re in the summer doldrums with little in the way of solid fundamental input to help centre the market and give a sense of longer-term direction. For now we have offsetting news flow where reports last week of US production hitting a three-year high are countered by a couple of weeks of larger-than-expected inventory drawdowns. There’s been some chatter of the futures market falling into backwardation which may signal that the supply glut is coming to an end. But some analysts are wary of reading too much into this at present.

Gold and silver were both weaker in early trade yesterday. The two metals gave back most of their gains from Monday’s session. However, both recovered as the US open approached with silver moving back into positive territory in the early part of the afternoon. But gold struggled for most of the session remains stuck underneath the critical $1,300 level for now. Meanwhile, silver managed to poke its nose back above $17, helped to some extent by a recent pick-up in industrial metals. It is perhaps worth noting the sharp rally in equity markets as investors went back into “buying the dips, risk-on” mode. Usually moves like this lead to a more significant pull-back in precious metals than the one we saw yesterday.

Forex Update

·         Dollar firmer against the majors

·         Euro slips after disappointing ZEW

The US dollar picked up a touch in early trade yesterday. By midday it had made solid gains versus all the majors, but in particular the euro and British pound. The euro wasn’t helped by the latest German ZEW Economic Sentiment survey which fell sharply in August, coming in at 10.0 after a reading of 17.5 in the prior month. The comparable survey for the Euro zone slipped to 29.3 from 35.6. The ZEW survey is considered one of the best forward-looking indicators and this drop suggests considerable nervousness amongst investors and analysts over the outlook for the next six months.

Yesterday’s move saw the EURUSD pull back below 1.1800 although the pair continues to trade in a relatively narrow range. Earlier this month the EURUSD briefly broke above 1.1900 to hit its highest level since early 2015. This now appears to be the top of an impressive rally which began at the beginning of this year. In early January the EURUSD hit a 14-year low but it went on to rally around 15% until early August. This led the ECB’s Governing Council (GC) to express concern about “the risk of the exchange rate overshooting in the future.” Last week sources close to the ECB insisted that President Draghi won’t be using his Jackson Hole speech to detail moves to wind down the central bank’s monthly bond purchase programme. However, some traders believe that this doesn’t preclude him from talking down the euro as the EURUSD gets ever closer to 1.2000. This currency strength hits the Euro zone’s exports with the rest of the world, and also has a dampening effect on inflation.

Meanwhile the GBPUSD pulled back to its lowest levels since late June. A break below 1.2800 opens up the possibility of a retest of support around 1.2600.

Upcoming events

Today’s significant events and economic data releases include a speech from ECB President Mario Draghi and French, German and Euro zone Flash Manufacturing and Services PMIs. Later on we have US Manufacturing and Services PMIs, New Home Sales and Crude Oil Inventories.


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Posted by David Morrison

Category: AM Bulletin

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