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08 Apr 2016
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07 Apr 2016
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06 Apr 2016
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06 Apr 2016
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05 Apr 2016
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05 Apr 2016
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 Tuesday 05 April 2016

AM Bulletin: Crude weighs on equities

 

 

Indices Update

There is a softer tone to global stock indices this morning. Partly this has to do with the sharp sell-off in the Japanese Nikkei and Hang Seng overnight. But mostly it is due to the continued sell-off in crude. Yesterday European equities and US stock index futures were firmer in early trade and shrugged off an initial sell-off in oil prices. But this morning WTI and Brent have slipped below support at $36 and $38 per barrel respectively.

Early last week equities got a boost following a dovish speech from US Federal Reserve Chairman Janet Yellen. She effectively ruled out an early rate hike, slapping down a number of her Fed colleagues who suggested the central bank could tighten monetary policy again this month. But on Friday the major indices initially sold off following the release of Non-Farm Payrolls for March. These came in better than expected as did average wages. The initial reaction suggested that investors really thought a rate hike in the first half of the year was still a possibility. But then they recalled Mrs Yellen’s speech and quickly changed tack. After all, equities should benefit from an uptick in inflation as long as the Fed doesn’t respond by tightening.

In the meantime we’ll be bombarded by the musings of Fed members so we should expect volatility. Yesterday Boston Federal Reserve President Eric Rosengren he thought that the Federal Reserve should hike rates sooner than the markets currently imply.

But we’re now entering a bit of a twilight zone as we await the start of the first quarter earnings season. This begins next week, although we may have to wait until May before we get a fuller picture of the health of corporate America.

The FTSE 100 index closed at 6,164.7 up 18.7 points on the day, or 0.3%

The German DAX rose 27.4 points or 0.3% to finish at 9,822.1

The US30 closed down 55.8 points to finish at 17,737.0 The S&P 500 fell 0.3% to close at 2,066.1 while the Nasdaq 100 lost 0.5% to close at 4,511.7

Equities Update

The European telecoms sector was in focus yesterday after talks between Orange (ORA-Paris) and Bouygues (EN-Paris) collapsed late on Friday. The idea was to create a dominant French operator through a proposed €10 billion cash-and-share deal. This was viewed seen as a last-ditch effort to reduce the number of French telecoms groups to three from four. This should have helped to boost profits, which have been hurt by the arrival of low-cost operator Iliad. Orange ended the day 6.2% lower at €14.45 while Bouygues SA fell 13.5% to close at €30.42

Commodities Update

Crude spent most of yesterday trading in negative territory with both WTI and Brent well below $40 per barrel. There appears to be some mild support for WTI and Brent around $36 and $38 respectively, on an end-of-day basis. In early trade this morning both contracts are trading below these levels and this is putting some downside pressure on equities.

Oil continues to struggle to resume its upward trend. Both contracts have pulled back from their best levels this year which were hit on 18th March. WTI has fallen around 12% since then while Brent is down about 8% over the same period. Rallies are getting sold rather than sell-offs being bought. The turnaround in WTI and Brent which followed talk of a possible agreement between OPEC and non-OPEC producers to freeze output at January’s levels seems to have run its course. There is a meeting scheduled for 17th April in Qatar when many of the world’s major oil producers will gather to discuss implementing a price freeze. But crude fell on Friday after Saudi Deputy Crown Prince Mohammed bin Salman told Bloomberg that Saudi Arabia will freeze its oil output only if Iran and other major producers do so too. Following his comments Iranian Oil Minister Bijan Zanganeh said Iran would continue to increase production and exports until it reaches the market position it enjoyed before the imposition of sanctions,

Gold and silver have rallied in early trade this morning despite a stronger dollar. The move seems connected to the sharp sell-off in the Japanese Nikkei and Hang Seng overnight.

The two precious metals spent most of Monday range-bound and in negative territory. This was despite very little movement in the US dollar as measured by the Dollar Index. At the end of last week the two metals slumped following the release of US employment data. Payrolls came in above the consensus market expectation but the unemployment rate ticked up slightly from an 8-year low. Average earnings rose 0.3% in March suggesting an uptick in inflationary pressures. Investors decided to hedge their bets on an increased likelihood of the Fed hiking rates in the first half of this year. However, the market reaction to the data release looked extreme, particularly as Janet Yellen had made it clear that the Fed would be very cautious when it came to raising rates.

Just a few weeks ago silver hit its highest level since the end of October last year. Meanwhile gold hit its highest intra-day level since February 2015. Both metals have pulled back since then however. Partly this has been down to the US dollar which had a brief bounce in mid-March. But also, there has been some consolidation and profit-taking which crept in following the strong performance of both metals since mid-December. 

Forex Update

There was very little movement in either the Dollar Index or the EURUSD currency pair yesterday. But this isn’t to suggest that FX markets had completely gone to sleep. The Japanese yen was firmer against most of the majors while the Australian dollar was probably Monday’ biggest casualty. These moves were extended in this morning’s early trade. As far as the Aussie dollar is concerned, investors were reducing their long-side exposure ahead of the Reserve Bank of Australia (RBA) rate decision overnight. In the end the RBA kept its headline Cash Rate unchanged at 2.0% as expected.

The yen has tacked on over 8% against the US dollar since the end of February which won’t please the Bank of Japan or Prime Minister Shinzo Abe. Japanese policymakers are desperate to keep the yen weak to make their exports as competitively-priced as possible. Usually yen strength is an indication that investors are going into “risk-off” mode. That may be true of today’s move, but yesterday it was much more about general US dollar weakness.  As noted in the Weekly Report the greenback has been struggling ever since early December when ECB President Mario Draghi announced an extension to its quantitative easing programme which fell short of expectations. Since then, and despite further rate cuts and stimuli from the European central bank, the dollar has weakened considerably. This seems as much a function of the Federal Reserve’s FOMC rowing back from its December rate hike projections. Last week’s dovish speech from Janet Yellen has also undermined the greenback. 

Upcoming events

Today’s significant economic events include German Factory Orders, Spanish Services PMI, Italian Services PMI, French Final Services PMI, German Final Services PMI, Euro zone Final Services PMI and Euro zone Retail Sales. From the UK we also have Services PMI and the Bank of England’s Financial Policy Committee Meeting Minutes. From the US we have the Trade Balance, ISM Non-Manufacturing PMI and JOLTS Job Openings.

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

Tagged: AM Bulletin

Category: AM Bulletin


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