Incisive market commentary from David Morrison

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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
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Indices Update

Overnight China’s Caixin Services PMI slipped to 51.8 from 52.2 previously. This was lower than the 52.6 expected. Although the survey indicates expansion in the services sector it is disappointing given Chinese policymakers’ attempts to shift the economy towards services and consumption and away from manufacturing and exports. Earlier in the week two Manufacturing PMIs dipped from the prior month with the Caixin dropping below 50, so indicating contraction. Nevertheless, the major European and US indices were firmer in early trade this morning with all getting a lift from a rally in oil.

It was a mixed start for European equities yesterday with most of the major indices little-changed on the open. However, they all turned lower as the morning session progressed. The UK’s latest Construction PMI dropped to 52 from 54.2 previously. This was well below the 54.1 consensus expectation. This followed on from Tuesday’s weak manufacturing data when the PMI survey dropped below 50 indicating contraction in the sector. Today we get the latest update on Services to complete the picture.

These numbers aren’t widely followed outside of the financial world so hopefully we won’t have any chancers from the Treasury blaming weak data on Brexit fears. There has been a downward trend in UK manufacturing, construction and services for over two years now so making that link is tenuous at best.

Nevertheless, there will be precious little chance of the BOE considering a rate hike this year until there’s a definite improvement in the trend for these numbers. It’s also worth noting that so far this week we’ve had poor manufacturing PMIs from the US and China, while data from across the Euro zone was mixed. Add in last week’s disappointing US GDP number and yet another dismal corporate earnings season and global equities could be in for a difficult month.

There were a number of attempts taken to push stocks higher but these had all run out of steam by the yesterday’s European close.

The FTSE 100 index closed at 6,112 down 73.6 points on the day or 1.2%

The German DAX fell 98.5 points or 1.0% to finish at 9,828.3

The US30 closed down 99.7 points to finish at 17,651.3 The S&P 500 ended 0.6% lower at 2,051.1 while the Nasdaq 100 ended down 0.7% at 4,312

Equities Update

Yesterday Sainsbury’s (SBRY) was the FTSE100’s biggest loser ending down 6.3% on the day at 267.8 pence. This followed the release of a poor set of results which, nevertheless, were better than expected. However, the supermarket giant warned that the market remained competitive. This means that the whole sector will be under pressure to keep prices low thanks to the likes of Aldi and Lidl. Tesco (TSCO) also lost ground on the news ending the day over 5% lower.

Meanwhile, clothing retailer Next (NXT) ended 3.5% higher at 5,150 pence. This was despite warning earlier this year that sales could fall by as much as 3.5% over the course of 2016. However, investors were relieved that the news wasn’t even more downbeat - Next had previously warned that 2016 could be its worst year since 2008. The biggest takeaway is that if Next is predicting a tough outlook going forward, then all is not well on the High Street. We’ve already seen BHS and Austin Reed throw in the towel so other chains could follow.  

Commodities Update

Yesterday the latest inventory data from the US Energy Information Administration (EIA) showed a build of 2.8 million barrels for the week ending 29th April. This was well above the 600,000 barrel build expected. Oil prices fell around 1% in the immediate aftermath of the release, but prices then rallied back sharply.

Overall, crude managed to put in a bit of a recovery yesterday. This followed a sell-off which began on Friday, just after Brent and WTI hit their highest intra-day levels since November. The retreat picked up steam on Monday after OPEC said that production in April climbed to 32.64 million barrels per day, close to its all-time record. At the same time, crude stockpiles at Cushing, Oklahoma came in above expectations.

Once again, crude took no notice of the US dollar which rallied again yesterday. Typically, dollar-denominated commodities tend to come under pressure when the greenback is rising. This is because they become more expensive for buyers who have to convert their own currencies in to dollars in order to buy oil on the international market.

Oil has put in an impressive rally since the beginning of this year with both Brent and WTI adding around 70% up until the end of last week. But a number of analysts are questioning if it can go much higher from here as prices in the $45/$50 per barrel and above will lead to mothballed US shale production coming back on line. In addition, this week’s disappointing manufacturing data from the US and China raise doubts over future demand growth.

Gold and silver both lost ground in early trade yesterday, but made back these losses to trade unchanged following the US ADP Employment report. This was much weaker than expected (details in the FX report below) and so doesn’t bode well for this Friday’s official Non-Farm Payroll report. The US dollar fell sharply following the ADP release as the weaker number would suggest that the Federal Reserve would be less likely to raise rates in the face of weakening economic data. However, the dollar quickly bounced off its lows and was soon back in positive territory. This put 

Forex Update

The US dollar built on Tuesday’s gains for the first half of yesterday’s European session. However, it sold off rapidly following the release of the latest ADP Non-Farm Employment change. This showed an increase of 156,000 jobs in April, miles below both the 205,000 consensus expectation and last month’s 200,000 gain. The poor jobs data was interpreted as reducing the likelihood of a US rate hike next month.

Investors view the ADP data as a “heads-up” ahead of the official Non-Farm Payroll report which is due out this Friday. It certainly is effective in measuring the overall trend in the data, but it can be patchy on a month-by-month basis. This is because the government’s number tends to be considerably more volatile, and of course it is this volatility that traders look for and react to. So the fact that yesterday’s release was so far away from trend will have traders scratching their heads. It may be positive for risk assets for the Fed to hold off from hiking rates (as this number suggests it might), but it sends a grim message about the state of the US economy.

Yet despite yesterday’s rally the Dollar Index is still trading below the 94.00 support level that it broke last Thursday. The USDJPY is also well below 110.00. On Tuesday the pair broke 106.00 to hit its lowest level since October 2014. Meanwhile, the EURUSD pulled back to trade below 1.1500. On Tuesday it briefly traded above 1.1600 - its best level since August last year.

The US dollar got a boost on Tuesday after San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart suggested that the US central bank could still hike rates at next month’s meeting. Mr Lockhart said that a rate rise was “a real option” and could see two hikes in 2016. Mr Williams said that as long as inflation and growth picked up then “it would be appropriate” to hike in June.

Upcoming events

There are a number of Bank Holidays today including for Japan, Switzerland, France and Germany.

Today’s significant economic events include the ECB Economic Bulletin, Euro zone Retail PMI and UK Services PMI. From the US we have Weekly Jobless Claims and Federal Reserve Bank of St. Louis President James Bullard will be speaking. 


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Posted by David Morrison

Category: AM Bulletin

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