Incisive market commentary from David Morrison

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Collapse 2017 <span class='blogcount'>(348)</span>2017 (348)
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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

·         Markets react to Trump Jnr’s emails

·         Focus now on Yellen testimony

European equities were firmer on the open following a bounce-back on Wall Street last night. US indices took a tumble after Donald Trump Jnr released an email trail detailing his contacts with a Russian lawyer ahead of last year’s presidential election. Low holiday liquidity and the recent pull-back in tech stocks contributed to general nervousness. The email release also led to a pull-back in the dollar and a ramp up in precious metals.

Now traders are looking ahead to Janet Yellen’s testimony in Washington later today. The main concerns for investors are the Fed’s plans when it comes to additional monetary tightening, and what could persuade it to alter course? Going by recent comments it seems clear the central bank is on a mission to “normalise” rates and reduce its balance sheet. The Fed expects to raise rates by 100 basis points between now and the end of 2018. It also expects to begin a gentle (maybe $10 billion per month) in balance sheet reduction by the end of this year. By contrast, the market expects just 50 basis points of rate hikes between now and the end of next year and a cautious slowdown in balance sheet reinvestment.

Why the discrepancy between the two sides? Well for one, over the past four years or so the Fed has repeatedly prepared the market for rate hikes which never came. Secondly, many analysts are concerned that the US economic recovery isn’t as robust as the Fed believes and that inflation is trending downwards rather than heading towards the Fed’s 2% target. Ultimately the central bank will be in no position to tighten so aggressively.

But there’s a school of thought that says the Fed knows it has missed a number of opportunities to raise rates and it’s now playing catch-up. It needs to push rates higher from here so it has room to cut when the next recession comes. Consequently, the attitude in the Fed has changed fundamentally and we can now expect it to tighten monetary policy slowly but steadily unless inflation plummets, unemployment soars or the stock market has an unruly correction. Otherwise we should expect a fed funds rate of around 3% with the balance sheet down to $2.5 trillion. If this analysis is correct, it now seems likely that the Fed will use every opportunity to make this clear.

Stock Index Update

·         Wall Street’s rollercoaster ride

·         Earnings season gets underway

US indices were little-changed in early trade. Investors appeared to be in no hurry to either add to or reduce their equity holdings ahead of Janet Yellen’s testimony in Washington or as they awaited some key earnings reports. Yesterday PepsiCo reported earnings per share of $1.46, up from $1.38 a year ago, and revenues of $15.71 billion, up 2.1%. The numbers comfortably beat forecasts of $1.40 and $15.6 billion respectively. Nevertheless, the shares ended the day 0.5% lower at $113.74

However, US indices slumped suddenly prior to the European close. The sell-off followed the appearance of emails which covered a meeting between Donald Trump Jnr and a Kremlin-linked Russian lawyer prior to the US presidential election. Low holiday liquidity and the recent pull-back in tech stocks contributed to general nervousness. However, the US majors subsequently bounced back and ended the session mixed.

The major European indices were all trading in positive territory soon after yesterday’s open. But they struggled to add to early gains as the session progressed, no doubt held back by a lacklustre performance from US stock index futures. Investors also had to deal with some disappointing earnings reports.  UK high street stalwart Marks & Spencer managed to disappoint once again. There was a 1.2% drop in quarterly like-for-like clothing and household sales, although the company kept its full-year guidance unchanged. Chief executive Steve Rowe insisted that M&S turnaround was going as planned and that first quarter trading was in line with the company's expectations. Despite this the shares fell more than 5% at one stage.

Commodities Update

·         Crude higher on US inventory data

·         Precious metals in late rally

Last night we had the latest update on US oil inventories from the American Petroleum Institute. This showed a massive 8.1 million barrel drawdown - way above the 2.5 million barrel reduction anticipated. Crude spiked higher on the news. It got a further lift after the Energy Information Administration (EIA) cut its US production outlook for next year. The EIA releases its own inventory data later this afternoon.

Both the API and EIA reported big drawdowns in US inventories last week. However, it has also been pointed out that this doesn’t mean these products have been used up, more that they have been exported elsewhere. The US now exports over 1 million barrels of crude per day - quite a jump since December 2015 when the restrictions on exports of domestically produced crude were lifted.

Crude oil was a touch firmer in early trade yesterday, building on Monday’s mildly positive close. However, it suddenly gave back its gains and fell into the red following the release of a new report from the International Energy Agency (IEA). The report says upstream oil and gas investment rebounded modestly in 2017. But prices reversed sharply later in the day after the EIA report and on the API inventory data.

Gold and silver were a touch lower in early trade yesterday with both metals giving back some of Monday’s gains. Gold hovered around $1,210 for a good part of the session before it moved back into positive territory just ahead of the European close. Silver outperformed its fellow precious metal although it did struggle a bit first thing. Nevertheless, it suddenly shot higher late afternoon and managed to build on gains from Monday. Both metals look slightly healthier now from a technical perspective after brave traders piled in to take advantage of the recent price melt-down. However, it may be a bit early to conclude that the worst is over. As stated previously, gold and silver typically struggle in an environment where US interest rates are set to rise yet inflation is falling.

Forex Update

·         Euro up against the majors

·         EURUSD hovers above 1.1400

The main feature in FX yesterday was that investors spent most of the session hoovering up euros and US dollars. The world’s two most heavily-traded and liquid currencies made gains versus all the other majors, although ultimately it was the euro which outperformed the greenback. This meant the EURUSD continued to hover above 1.1400 and within a few ticks of its high for this year hit back at the end of June. The euro continues to be in demand as investors increasingly position themselves for the possibility of monetary tightening from the European Central Bank (ECB). Recent comments from ECB President Mario Draghi and some of his colleagues have suggested that the bank is getting closer to withdrawing monetary stimulus. However, there’s a danger that investors get over-excited over recent remarks. As things stand, there’s precious little evidence from the ECB that it will end its €60 billion per month bond purchase programme before the end of this year. Nevertheless, there is evidence that the euro zone is experiencing some decent economic growth and that previous deflationary pressures have passed. But Mr Draghi is a notorious dove and is perfectly capable of seeing off the more hawkish members of the Governing Council.

Upcoming events

Today’s significant events and economic data releases include UK Claimant Count Change, Unemployment Rate, Average Earnings Index and Euro zone Industrial Production. Later in the day Federal Reserve Chair Janet Yellen testifies in Washington and we have an update on US crude oil inventories.


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Posted by David Morrison

Category: AM Bulletin

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