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
PM Bulletin: USDJPY – set to break below 100?
27 Sep 2016
AM Bulletin: Equities rally after “Clinton win” in presidential debate
27 Sep 2016
Trading Guides: How margin works with spread betting
26 Sep 2016
Weekly Bulletin:Fed rate hike: postponed or cancelled?
26 Sep 2016
AM Bulletin: Equities dip after central bank-driven rally
23 Sep 2016
Video Update: FOMC keeps rates on hold
22 Sep 2016
AM Bulletin: Fed loses the (dot) plot
22 Sep 2016
PM Bulletin: FOMC in focus
21 Sep 2016
AM Bulletin: Mixed messages from BOJ
21 Sep 2016
PM Bulletin: BOJ look-ahead
20 Sep 2016
AM Bulletin: Stock indices swing on oil price
20 Sep 2016
Trading Guide:Fundamentals - Developing trading ideas
19 Sep 2016
Weekly Bulletin: All eyes on the Fed and BOJ
19 Sep 2016
PM Bulletin: Developed World Top Trumps
16 Sep 2016
AM Bulletin: Weak US data boosts equities
16 Sep 2016
Video Update: What to expect from the Fed
15 Sep 2016
AM Bulletin: US Retail Sales and BoE rate decision ahead
15 Sep 2016
PM Bulletin: The BoE and Beyond
14 Sep 2016
AM Bulletin: Investors nervous ahead of Fed meeting
14 Sep 2016
PM Bulletin: US stock indices coming under pressure
13 Sep 2016
AM Bulletin: Fed keeps us guessing
13 Sep 2016
Weekly Bulletin: Central banks remain in focus
12 Sep 2016
Trading Guides: How to make money spread betting
12 Sep 2016
Comparing major Central Banks
09 Sep 2016
AM Bulletin: ECB disappoints
09 Sep 2016
Video Update: Is the Fed really data-dependent
08 Sep 2016
AM Bulletin: ECB rate decision in focus
08 Sep 2016
Video Update: ECB Look- ahead
07 Sep 2016
AM Bulletin: Weak US data reduces likelihood of September hike
07 Sep 2016
PM Bulletin: EURUSD – still range bound
06 Sep 2016
AM Bulletin: Traders back after long US weekend
06 Sep 2016
Weekly Bulletin: Poor NFP suggests no September rate hike
05 Sep 2016
PM Bulletin: Non-Farm Payrolls disappoint
02 Sep 2016
Holiday Schedule: Labour Day, 5th September 2016
02 Sep 2016
AM Bulletin: All eyes on US Non-Farm Payrolls
02 Sep 2016
Video Update: Look-ahead to Friday's Non-Farm Payrolls
01 Sep 2016
AM Bulletin: Stock indices bounce back
01 Sep 2016
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Indices Update

There’s a slightly softer tone to European equities this morning as investors dial back their exuberance following a couple of “friendly” central bank meetings. This may just be a touch of profit-taking which leads to further consolidation after the sharp rally since midweek. Alternatively, it could be that investors are reassessing the outlook for monetary policy generally.

It can’t have escaped anyone’s notice the abject failure of that policy to date. The question is whether central banks are out of ammunition, or if they now embark on even more extraordinary measures. These would include taking headline interest rates significantly lower (meaning negative rates around the world) or adopting “helicopter money” in a desperate attempt to boost demand and inflation. Such measures may well underpin equity, bond and property prices. But they really would be an even bigger jump into uncharted territory where the consequences are unknown. The really chilling aspect to all of this is that the (unelected) individuals who would decide on and then implement these policies are the same (or similar) ones who have messed up so spectacularly to date.

The FTSE 100 ended the day 76.6 points higher at 6,911.4

The German DAX rose 237.7 points or 2.3% to end the day at 10,674.2

The US30 closed up 98.8 points to finish at 18,392.5 The S&P 500 ended up 0.7% at 2,177.2 while the Nasdaq 100 rose 0.8% to close at 4,891.4


There are two sectors that have done particularly well out of Wednesday’s central bank meetings. Banking stocks soared following the BOJ’s announcement that it would now target a zero yield for the 10-year Japanese government bond. As the BOJ has a short-term interest rate of -0.1% then it can achieve a positive yield curve by anchoring the 10-year at zero. This means the BOJ can steepen the yield curve and so boost banking sector profit margins by taking its Policy Rate further into negative territory.

Yesterday miners topped the FTSE100 leader-board following the Fed’s decision to keep rates unchanged. The dollar fell sharply following the announcement and this saw metals and other dollar-denominated commodities rally. Among the top gainers were BHP Billiton (BLT), Rio Tinto (RIO), Antofagasta (ANTO) and Anglo American (AAL).

Commodities Update

The rally in crude continued yesterday in a move that took Brent and WTI up around 5% and 7% respectively from Tuesday’s lows. The trigger for the surge was the latest US inventory update from the American Petroleum Institute (API). This showed a drawdown of 7.5 million barrels of crude for the week ended 16th September. The market expectation had been for a build of 3.3 million. There was also a bigger-than-expected drawdown in gasoline stocks which declined by 2.5 million barrels on expectations of a 1.4 million barrel drawdown. However, this was partially offset by distillate stocks which rose for the sixth consecutive week. The sharp decline in stockpiles was confirmed on Wednesday when the Energy Information Administration (EIA) released its own update. This showed a fall of 6.2 million barrels in crude, also on expectations of a 3.3 million build.

But while stockpiles were the catalyst for the move, there’s definitely a technical aspect to this week’s surge. Both WTI and Brent bounced off the 61.8% Fibonacci Retracement of the rally in the first few weeks of August. The big question now is whether Brent and WTI will continue to find enough buyers for them to retest resistance which comes in (very roughly) around $49 and $47 respectively. For the moment both contracts are getting a boost from dollar weakness following the Fed’s decision to hold back from hiking rates. The Bank of Japan’s intention to take control of the yield curve is also helping and all this overshadowed the news that Russian oil output hit a new record above 11 million barrels per day and that Libya had exported its first oil cargo from the port of Ras Lanuf since 2014.

The world’s major oil producers meet in Algeria next week where one of the hot topics will be the possibility of freezing output. Very few analysts believe that an agreement can be reached, let alone honoured. It’s questionable if the Algiers talks are having much market impact now. Not only that, but it’s increasingly clear that US shale producers will raise output on any significant price increase, so a freeze would be self-defeating for OPEC and non-OPEC (Russia) exporters.

Gold and silver rallied sharply on Wednesday evening following the Fed’s decision to keep interest rates unchanged. Both managed to build on these gains yesterday afternoon as the dollar came under renewed selling pressure. The prices of both precious metals are highly sensitive to interest rate moves, particularly in the US. Higher rates raise the lost opportunity costs of holding non-yielding assets such as gold and silver. Higher US rates also tend to lift the dollar which means that dollar-denominated commodities become more expensive to non-dollar holders.

Some analysts feel that the upside for both precious metals is capped as the Fed hinted that it is prepared to raise rates at its December meeting. However, it’s worth considering a key sentence in the Fed’s statement: the FOMC said it wanted to “wait for further evidence of continued progress toward its objectives” before hiking. This means that the committee will need to see a string of stronger data points between now and the year-end. The trouble is that the trend in recent economic releases has been negative, suggesting that the FOMC may have even more of an excuse to hold back from hiking rates in December than it did on Wednesday.

Forex Update

There were two notable moves across FX yesterday: general dollar weakness, and a pull-back in the yen. As far as the yen was concerned, this looks like nothing more than profit-taking following its post-BOJ rally. The USDJPY is dangerously close to breaking back below 100 despite the BOJ’s announcement that it would anchor the yield on the 10-year JGB at zero.

The dollar sold off sharply on Wednesday after the Federal Reserve held off from hiking rates following its two-day meeting. The Fed decision was widely predicted, and many commentators were quick to point out that a December hike now looked highly likely. Yet while the Fed’s FOMC stated that while “the case for an increase in the federal funds rate has strengthened” they wanted “to wait for further evidence of continued progress toward its objectives”. The trouble is that polar ice caps could melt before the Fed’s “objectives” are met. 

So, FX pairs will continue to fluctuate on each and every data release between now and the December meeting. That means three updates on Non-Farm Payrolls, Manufacturing and Non-Manufacturing PMIs, Industrial Production, Retail Sales, Durable Goods, CPI, PCE, housing – well you get the picture. Not only that but Fed Chair Janet Yellen, rather pathetically, tried to persuade investors that every Fed meeting is “live” when it comes to the possibility of a rate hike. That includes the one in November which comes just one week ahead of the US Presidential Election.

But no doubt the Fed will consider Wednesday’s announcement an overall success. After all, the dollar is weaker while equities have soared. The trouble is that the US central bank is stuffed if the economic data continues to weaken. Investors will start to worry that any downturn could end up turning into a recession, and the Fed now risks fighting this with rates stuck below 0.50%. Not only that, but the FOMC is very close to losing all credibility, particularly when Dr Yellen and her Fed Vice-Chair Stanley Fischer stated just a few weeks ago that the stage was set for two rate hikes in 2016.

Upcoming events

Today’s significant economic events include French, German and Euro zone Flash Manufacturing and Services PMIs. From Canada we have CPI and Core Retail Sales while from the US we also have the Markit Flash Manufacturing PMI. 


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Posted by David Morrison

Category: AM Bulletin

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