Incisive market commentary from David Morrison

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AM Bulletin: Troubles at Deutsche rile investors
30 Sep 2016
AM Bulletin: OPEC “deal” sends oil soaring
29 Sep 2016
Video Update: Trouble at Deutsche Bank
28 Sep 2016
AM Bulletin: Banks lead equity rally
28 Sep 2016
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27 Sep 2016
AM Bulletin: Equities rally after “Clinton win” in presidential debate
27 Sep 2016
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26 Sep 2016
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26 Sep 2016
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23 Sep 2016
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22 Sep 2016
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22 Sep 2016
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21 Sep 2016
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21 Sep 2016
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20 Sep 2016
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20 Sep 2016
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19 Sep 2016
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19 Sep 2016
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16 Sep 2016
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16 Sep 2016
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15 Sep 2016
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15 Sep 2016
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14 Sep 2016
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14 Sep 2016
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13 Sep 2016
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13 Sep 2016
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12 Sep 2016
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12 Sep 2016
Comparing major Central Banks
09 Sep 2016
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09 Sep 2016
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08 Sep 2016
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08 Sep 2016
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07 Sep 2016
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07 Sep 2016
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06 Sep 2016
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06 Sep 2016
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05 Sep 2016
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02 Sep 2016
Holiday Schedule: Labour Day, 5th September 2016
02 Sep 2016
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02 Sep 2016
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01 Sep 2016
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01 Sep 2016
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 Wednesday 28 September 2016

AM Bulletin: Banks lead equity rally



Indices Update

In today’s early trade European equities were slow to pick up on Wall Street’s rally yesterday evening. However, there’s now a bullish tone across all equities now as concerns over Europe’s banking sector and weakness in the oil price have been shrugged off. Deutsche Bank (DBK) is sharply higher while crude has steadied, despite Saudi Arabia and Iran once again failing to reach agreement over curbing oil production.

Global stock indices rallied sharply in early trade yesterday following the first US presidential debate between Hillary Clinton and Donald Trump. Political pundits were divided over who fared best. But as far as investors were concerned it was Ms Clinton who got the better of “The Donald.” Ms Clinton was viewed as being the better prepared of the two candidates and there was some surprise that she managed to needle her opponent so effectively over both his tax arrangements and the way he had doggedly insisted that President Obama wasn’t an American citizen. Ms Clinton is the establishment candidate while Mr Trump is still an unknown quantity – where policy is concerned anyway. A vote for Clinton is seen as a vote for the status quo and while Trump is considered unpredictable. If there’s one thing that investors dislike it’s uncertainty and instability.

But European and US stock indices came off their best levels as the session progressed and the European majors ended lower on the day. Partly this was due to investors being wary of placing too much importance on a single debate as there are two more to come. But also there are ongoing concerns over the health of the European banking sector. However, US indices rallied yesterday evening despite a sharp sell-off in crude oil.

The FTSE 100 ended the day 10.4 points lower at 6,807.7

The German DAX fell 32.2 points or 0.3% to end the day at 10,361.5

The US30 closed 133.5 points higher to finish at 18,228.3 The S&P 500 ended up 0.6% at 2,159.9 while the Nasdaq 100 rose 1% to close at 4,866.7


Deutsche Bank (DBK) continued to slide yesterday raising concerns of a fresh “Lehman Moment” for the global banking sector, and by extension, trouble for financial markets in general.  One of the factors contributing to Deutsche’s woes was the proposed $14 billion fine from the US Department of Justice (DOJ). The penalty relates to the bank’s involvement in residential mortgage-backed securities between 2005 and 2007.

Yesterday another giant German corporation fell across the DOJ’s gunsights. Bloomberg reported that the DOJ is calculating "how big a criminal fine it can extract from Volkswagen AG (VOW) over emissions-cheating without putting the German carmaker out of business." The US is attempting to push things along in an effort to reach a settlement by January. This is when a new US administration comes into office which is likely to replace the political appointees overseeing the current process. Shares in VW were down around 5% in early European trade but subsequently rallied to close down 2.1% at €123.95

Commodities Update

Oil prices fell in early trade yesterday, giving back all of Monday’s gains and more. Investors had been whipping the price around ahead of the International Energy Forum (IEF) in Algeria which is really little more than a talking shop. However, it took on significance after a number of smaller OPEC producers indicated at the beginning of August that an output freeze would be discussed in a side meeting during the event. Crude oil rallied sharply in the fortnight after this was suggested. However, investor enthusiasm subsequently cooled and prices have swung around on rumour and counter-rumour concerning an output freeze, along with changes in US crude inventories.

Yesterday it appeared that there were unbridgeable differences between Saudi Arabia and Iran which meant that a deal to freeze output would prove impossible. Iran said it was not looking to reach agreement at the Algerian IEF. A formal OPEC meeting will take place in Vienna on 30th November, when a supply agreement may be reached.

A research note from Goldman Sachs also weighed on oil prices. The US investment bank lowered its price forecast for the fourth quarter of this year to $43 from $50. The bank now expects a global surplus of 400,000 barrels per day for the fourth quarter which is a big increase from the drawdown of 300,000 barrels per day previously anticipated.

Gold and silver spent most of yesterday morning trading in positive territory. However, both lurched lower ahead of the open of the US futures market. Some of the move was tied to a pick-up in the US dollar. But this looked like little more than a trigger for profit-taking following last week’s rally.

The two precious metals rallied sharply last Wednesday after the US Federal Reserve kept its headline fed funds rate unchanged. Gold and silver are highly sensitive to moves in US interest rates. When rates are low they decrease the lost opportunity costs of holding non-yielding assets such as gold and silver. Lower US rates also tend to weigh on the dollar which means that dollar-denominated commodities are cheaper to buy for non-dollar holders.

Forex Update

The US dollar managed a decent rally yesterday although it is still well down from where it stood this time last week, just ahead of the US Federal Reserve’s FOMC meeting. Back then the FOMC voted to keep rates unchanged, while signalling the likelihood of a December hike. While this was broadly as expected, the greenback fell sharply on the news. The EURUSD was trading below 1.1150 ahead of the meeting but rallied by one and a quarter cents over the next few sessions.

Meanwhile, minutes from the Bank of Japan’s (BOJ) meeting back in July showed that BOJ members saw that risks to Japan's economic activity and prices “remained skewed to the downside." After last week’s meeting the BOJ switched its focus to interest rates and the first ten years of the yield curve and away from its asset purchase programme.

In other news the World Trade Organization (WTO) cut its forecast for global trade growth this year to 1.7%, down from the WTO's previous estimate of 2.8% in April. Director-General Roberto Azevedo said this should be a wake-up call for governments as it marked the first time in 15 years that international commerce lagged behind the world’s economic growth rate.

Upcoming events

Today’s significant economic events include the release of the German GfK Consumer Climate survey and the Swiss KOF Economic Barometer. From the US we have Durable Goods and Crude Oil Inventories. In addition, Fed Chair Janet Yellen will testify on supervision and regulation before the Committee on Financial Services, Federal Reserve Bank of St. Louis President James Bullard will deliver opening remarks at the Federal Reserve Bank of St. Louis Conference and ECB President Mario Draghi will speak about current developments in the euro area at the German Bundestag.


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Posted by David Morrison

Category: AM Bulletin

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