NEWS AND ANALYSIS

Incisive market commentary from David Morrison

Stay ahead with our market commentary and webinars from our in house market strategist

Open a Live AccountOpen a Demo Account
 
+ Show blog menu

Categories

Menu

Expand 2017 <span class='blogcount'>(342)</span>2017 (342)
Collapse 2016 <span class='blogcount'>(483)</span>2016 (483)
Expand December <span class='blogcount'>(23)</span>December (23)
Expand November <span class='blogcount'>(41)</span>November (41)
Expand October <span class='blogcount'>(37)</span>October (37)
Expand September <span class='blogcount'>(41)</span>September (41)
Expand August <span class='blogcount'>(52)</span>August (52)
Expand July <span class='blogcount'>(38)</span>July (38)
Expand June <span class='blogcount'>(42)</span>June (42)
Collapse May <span class='blogcount'>(42)</span>May (42)
PM Bulletin: BOJ and the yen
31 May 2016
AM Bulletin: Quiet start following holiday weekend
31 May 2016
PM Bulletin: Meanwhile in China
27 May 2016
AM Bulletin: Yellen in focus ahead of holiday weekend
27 May 2016
PM Bulletin: FTSE breaks above 6,200 again
26 May 2016
Holiday Schedule: Memorial Day 30th May 2016
26 May 2016
AM Bulletin: Brent crude tops $50
26 May 2016
PM Bulletin : Crude Chart
25 May 2016
AM Bulletin: “Risk-on” trade continues
25 May 2016
PM Bulletin: Another poll boost for sterling
24 May 2016
AM Bulletin: Equities slip as rate hike worries persist
24 May 2016
PM Bulletin: Changing expectations
23 May 2016
Weekly Bulletin: I’ll see your hike and raise you two
23 May 2016
PM Bulletin : Significant events ahead of June FOMC
20 May 2016
AM Bulletin: Preparing for a summer rate hike
20 May 2016
PM Bulletin : Gold struggles as dollar strengthens
19 May 2016
AM Bulletin: FOMC more hawkish than anticipated
19 May 2016
PM Bulletin : FOMC minutes and the S&P
18 May 2016
AM Bulletin: FOMC minutes in focus
18 May 2016
PM Bulletin: Cable rallies on latest poll
17 May 2016
AM Bulletin: US equities lead bounce-back
17 May 2016
Weekly Bulletin : Waiting on Central Banks
13 May 2016
PM Bulletin : Apple
13 May 2016
Holiday Schedule Whit Monday Market Holiday
13 May 2016
AM Bulletin : US Retail Sales in focus
13 May 2016
PM Bulletin : Silver and Gold
12 May 2016
AM Bulletin: Investors wary after Wall Street sell-off
12 May 2016
PM Bulletin: Two headaches for Elon Musk
11 May 2016
AM Bulletin: Stock indices pull back after rally
11 May 2016
PM Bulletin: Yen pulls back on jawboning
10 May 2016
AM Bulletin: Markets steady on commodity bounce
10 May 2016
PM Bulletin: Precious metals give back recent gains
09 May 2016
Weekly Bulletin: Poor Non-Farm Payroll causes concern
09 May 2016
May: Non Farm Payrolls Out Today
06 May 2016
PM Bulletin: A dismal Non-Farm Payroll number
06 May 2016
AM Bulletin: Non-Farm Payrolls in focus
06 May 2016
PM Bulletin: Non-Farm Payroll look-ahead
05 May 2016
AM Bulletin: Crude bounce lifts equities
05 May 2016
PM Bulletin: Apple update
04 May 2016
AM Bulletin: Equities under pressure
04 May 2016
PM Bulletin: Aussie dollar slumps
03 May 2016
AM Bulletin: RBA cuts by 25 basis points
03 May 2016
Expand April <span class='blogcount'>(45)</span>April (45)
Expand March <span class='blogcount'>(41)</span>March (41)
Expand February <span class='blogcount'>(42)</span>February (42)
Expand January <span class='blogcount'>(39)</span>January (39)
 
 
 Thursday 26 May 2016

AM Bulletin: Brent crude tops $50

 

 
Indices Update
 

European equities and US stock index futures were mixed in early trade this morning. Asian Pacific indices were little-moved overnight despite another triple-digit gain from the Dow. Brent finally topped $50 per barrel for the first time in seven months. Now we’ll see if WTI can follow.

The rally in European and US equities continued yesterday as all the major indices flew higher. Investors took heart from a number of different events. Early on Wednesday, Euro zone finance ministers and the IMF gave a green light for another round of aid for Greece. This includes €10.3 billion in fresh loans, starting with a €7.5 billion instalment in the second half of June. The news saw Greek bonds rally with yields falling to six-month lows. In addition, Athens won additional pledges of debt relief, providing it follows through on the reforms promised this weekend. Even then there will be nothing significant before 2018. So it’s tempting to believe that the Euro zone and Greece are now working in perfect harmony. However, the cynic in me wonders if there was any danger of a disagreement ahead of the UK referendum. Let’s see how this all stacks up in a month’s time.

In other news, the People's Bank of China (PBOC) lowered the yuan's reference rate to the US dollar by 0.3% overnight. This means the yuan is now trading at its weakest level against the greenback since March 2011. It’s important to keep an eye on what the PBOC does now given the recent strength of the US dollar. China pegs the yuan to the dollar so as the dollar rises it means that the yuan does too, making Chinese exports less competitive. The last thing anyone wants is sudden yuan devaluation. That happened last August and again in January this year. On both occasions the move led to a slump in global markets.

Investors still appear relatively unconcerned over the prospect of monetary tightening from the US Federal Reserve. This could be because they don’t believe it’s coming, or more likely they feel that the market will be able to cope with it. Certainly, another rate hike should boost lending margins in the banking sector, but it won’t help US multinationals if the dollar continues to strengthen. It will also put downside pressure on dollar-denominated commodities including oil. This should prove to be another headwind for equities.

The FTSE 100 index closed at 6,262.9 up 43.6 points on the day, or 0.7%

The German DAX rose 147.9 points or 1.5% to end the day at 10,205.2

The US30 closed up 145.5 points to finish at 17,851.5. The S&P 500 rose 0.7% to close at 2,090.5 while the Nasdaq 100 gained 0.7% to close at 4,476.4

Equities

Marks & Spencer (MKS) saw its share price dive yesterday. This followed a warning from the high street retailer that profits were set to be down again this year. The company also released results for the 53 weeks ending 2nd April. Group sales rose 2.4% to £10.6 billion while the underlying pre-tax profit was up 4.3% to £689.6 million. However, when one-off items were added back in (IT write-offs and a provision for mis-selling at M&S Bank), pre-tax profits slumped 19% to £488.8 million. Earnings per share dropped 16.2% to 24.9 pence. As usual M&S did well on food but poorly on clothing. But investors were unimpressed by new CEO Steve Rowe’s response to the issue. He said that sales in clothing have been "unsatisfactory for a number of years" and M&S would ditch fashion trends in favour of "accessible products” for its customers. M&S investors have heard this all before. The shares closed down 10.2% at 399.4 pence. 

     
Commodities Update
 

Crude oil shot higher in early trade yesterday and the rally has continued this morning. The front-month Brent contract has now broken above $50 per barrel for the first time in seven months. WTI has come close and now it looks as if it’s just a matter of time before it breaks through too.  

Brent and WTI have been stuck in a trading range since mid-May with support around $48. So now it’s a question of whether the $50 level will be broken convincingly and then held over the coming weeks. Crude has been pushing higher despite a stronger dollar. This has been down to recent predictions that supply and demand will be coming back into balance sooner than was estimated earlier this year. However, there are some questions over the outlook for demand growth, given uncertainty surrounding the economic situation in China.

The latest update on US Crude Inventories from the US Energy Information Administration (EIA) showed a drawdown of 4.2 million barrels. This was far more than the consensus expectation of a drawdown of 1.7 million barrels for the week ending 20th May. Prices spiked higher initially but then pulled back. The news of this sharp drawdown followed a similar report from the American Petroleum Institute (API) on Tuesday. This showed a reduction of 5.14 million barrels – far more than the 2 million draw expected – and the largest draw on stockpiles since December 2015. The news led to a spike higher in crude with both Brent and WTI surging above $49 per barrel.

One of the main drivers for the rally in crude so far this year has been the outlook for supply and demand. Analysts now expect rebalancing to take place much sooner than was estimated just a few months ago. We’ve had a number of supply disruptions recently (the Canadian wildfires, the political crisis in Venezuela and hostilities in Nigeria and Libya) and some bigger-than-expected drawdowns in US inventories. This further dims the prospect (if any really existed) of OPEC agreeing to an output freeze when it meets next week. Iran and Iraq continue to increase production and Saudi Arabia is still determined to increase its market share. However, the outlook for demand growth is cloudy, particularly given uncertainties over China’s economic outlook.

Yesterday brought another grim trading session for gold. On Tuesday it fell back below $1,240 for the first time since late April. But yesterday it broke below $1,220 and hit its lowest intra-day level in over six weeks. There was no single catalyst for the sell-off. The dollar couldn’t really take much blame as it was generally weaker against the majors. Also, silver held up relatively well for most of yesterday and seems to be holding onto support around $16.20 per ounce.

Gold appears to be out of favour with investors as they ponder the likelihood of a summer rate hike from the Federal Reserve. The general thinking goes that any rate increase lessens the attractiveness of holding gold as an asset. This is because it doesn’t pay interest or a dividend, so falls out of favour when compared to financial instruments that do. At the same time, the current “risk on” rally in equities is also putting downward pressure on gold and silver as investors become less interested in seeking out safe havens. Nevertheless, gold managed to f8ind some support around $1,220 and made back some of its losses later in the day. 

Forex Update
 

Once again the British pound pushed higher against the majors. Cable broke above 1.4700 yesterday after testing and then blowing past resistance around the 1.4640 level. The rally in sterling follows the release of a succession of polls which show the “Remain” campaign building a substantial lead over the “Leavers” in the UK referendum on EU membership.

As I wrote in Tuesday’s PM bulletin, chart-wise a break above here opens up the prospect of a move towards 1.4880/1.4900. However, this would take cable back up to levels last seen in mid-December which is around the time that the threat of a Brexit began to get priced into the pair. This may be too much of a move so far ahead of the referendum.

Yesterday the US dollar ceded ground against the majors. However, its losses were modest although it will be interesting to see if we’re now seeing a drop-off in upside momentum for the greenback. As we know, the dollar has benefited from last week’s outbreak of hawkishness from the US Federal Reserve. However, it’s fair to say that expectations of as many as three rate hikes over the rest of the year seem somewhat fanciful.

It’s worth noting that the majority of Fed speakers that we’ve heard from since early last week have not been voting members of the FOMC. Admittedly, James Bullard is and earlier this week he told CNBC that a June/July rate hike wasn't set in stone but said that the labour market was the strongest reason for making a move. He also suggested that below trend growth was a factor in arguing against a rate hike. He will be speaking this morning in Singapore.

But realistically there are just three Federal Reserve members who decide monetary policy: Fed Chairman Janet Yellen, Fed Vice Chairman Stanley Fischer and FOMC Vice-Chairman (and president of the all-important Federal Reserve Bank of New York) William Dudley. Everyone is getting agitated about the prospect of Janet Yellen speaking tomorrow evening. But perhaps they shouldn’t be, given that she is set to receive an award and then engage in a conversation about her “ground-breaking achievements” at Harvard’s Radcliffe Day 2016.

Upcoming events

 

Today’s significant data releases include the second estimate for UK first quarter GDP, UK Preliminary Business Investment and BBA Mortgage Approvals. From the US we have Durable Goods, Weekly Jobless Claims and Pending Home Sales. We also have speeches from FOMC-voting members James Bullard and Jerome Powell. 

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: AM Bulletin


Add a comment Add comment            

 

 
© 2017 Spread Co Limited. All Rights Reserved.

Spread Co Limited is a limited liability company registered in England and Wales with its registered office at 22 Bruton Street, London W1J 6QE. Company No. 05614477. Spread Co Limited is authorised and regulated by the Financial Conduct Authority. Register No. 446677.

Spread betting and CFD trading are leveraged products and can result in losses that exceed your deposits. Ensure you understand the risks.

Losses can exceed deposits. Click here to learn more.