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31 Mar 2016
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04 Mar 2016
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 Wednesday 23 March 2016

AM Bulletin: Equities head higher

 

 

Indices Update

It was a mixed start for global stock indices ahead of the open. However, US futures and European equities began to push higher as morning trade got underway. This was despite the continuation of the dollar rally which has helped to keep a lid on oil prices.

European equities and US stock index futures fell in early trade yesterday as news broke of fresh terrorist atrocities in Belgium. But global stock indices recovered off their worst levels as yesterday’s trading session progressed.

Equity markets continue to enjoy support from the loose monetary policies of the world’s major central banks. Yet despite this it feels as if the momentum of the rally which began in the middle of February is beginning to fade. There are fears that the positive effects of quantitative easing and negative interest rates may be coming to an end. ECB President Mario Draghi has repeatedly warned that there are limits to monetary stimulus. At some stage elected representatives have to step up to the mark and make fiscal adjustments – no matter how unpopular it may make them.

In addition, there is another factor that could weigh on stocks in the near-term. A US buyback blackout period began on Monday ahead of the first quarter earnings season. Companies are forbidden from buying their own stock in the month ahead of their earnings announcement. Buybacks have been a major factor in keeping stock prices at elevated levels. So the absence of this support could mean that equity markets will struggle to make further gains after their recent rally.

The FTSE 100 index closed at 6,192.7 up 8.2 points on the day, or 0.1%

The German DAX rose 41.4 points or 0.4% to finish at 9,990

The US30 closed down 41.3 points to finish at 17,582.6 The S&P 500 fell 0.1% and closed at 2,049.8 while the Nasdaq 100 rose 0.2% to close at 4,437.6

Equities Update

Unsurprisingly the market reaction to the Belgian attacks was sharp and negative. Travel operator Thomas Cook (TCG) dropped over 8% in the first 30 minutes of trading. It bounced subsequently, but then ran into a fresh batch of selling. Tui’s (TUI) stock price followed a similar pattern, although to a less extreme degree. Airline stocks were also affected with Ryanair (RYA), International Consolidated Airlines (IAG) and easyJet (EZJ) all falling in the aftermath of the attack. Investors also lightened up on cruise operator Carnival (CCL) and hotel group Intercontinental Hotels (IHG).

Overall, investors were quick to punish the travel and leisure sectors just as they did following the terrorist outrages in Paris last year. These terrible events invariably lead to a loss of confidence as the cold calculation is that the companies will suffer a downturn in tourist and business activity.

However, Carnival has had some good news after it won Cuban government approval to begin sailing to the Caribbean island. Its Fathom division will become the first US cruise line to dock there in more than 50 years.

Commodities Update

Yesterday crude fluctuated between positive and negative territory, but held within a relatively narrow trading range. Oil ended Monday modestly higher following news of a drop in US inventories. The latest weekly update from market intelligence provider Genscape showed a modest decline in oil stocks at Cushing, Oklahoma. Investors are now looking forward to the official numbers from the Energy Information Administration later today.

Yesterday crude slipped in the immediate aftermath of the terrorist attack in Belgium. However, trader focus still appears to be on the proposed OPEC/non-OPEC production freeze meeting set for 17th April in Qatar. The idea for this gathering followed a meeting in February between Saudi Arabia, Russia, Venezuela and Qatar. This was when the idea of freezing crude output at January levels was first mooted. At the time Iran ridiculed the plan. Nevertheless, news that OPEC and non-OPEC producers were talking to each other has been enough to give prices a boost. In reality, this may be as good as it gets. After all, it looks unlikely that Iran will attend the April meeting and Kuwait has said recently it won’t agree to any freeze unless Iran does too. At the same time, Iraq, which has the strongest supply growth within OPEC, is also said to have little interest in curbing production.  

Gold and silver rose sharply following the report of the outrage in Belgium. The two precious metals shot higher as investors sought them out as safe havens. But both pulled back from their best levels later in the day as the US dollar began to rally. Dollar-denominated commodities tend to decline when the greenback rises as they become more expensive for other currency holders to purchase. Gold hasn’t been helped by speeches from San Francisco Federal Reserve President John Williams and Atlanta Federal Reserve President Dennis Lockhart. Both said that the FOMC may consider raising rates as early as next month, rather than waiting for June. However, investors would do well to take anything that Fed members say now with a shovel-full of salt. This is nothing more than pre-planned Fed jawboning designed to test out market reaction to an early tightening of monetary policy. On top of that neither Williams nor Lockhart are FOMC-voting members this year.

Forex Update

The US dollar made modest gains yesterday against the majors. Investors headed back to the relative safety of the greenback following news of the Belgian bomb attacks. However, it could be argued that the outrage simply provided the catalyst for a mild bout of profit-taking. The dollar has fallen sharply since the beginning of the month and some buying had begun to creep in at the end of last week. Yesterday’s outrage provided another reason for traders to flatten or reverse recent positions.

Sterling suffered another sharp sell-off yesterday. The Belgian bombing was seen as making a Brexit more likely and this persuaded sterling longs to cash in any profit-making positions. Cable has enjoyed a decent rally so far this month. This follows Monday’s decline after Ian Duncan Smith resigned from the cabinet. His resignation and the accompanying letter were seen as extremely damaging to Chancellor George Osborne and by extension, David Cameron.

Upcoming events

Today’s significant data releases include Swiss ZEW Economic Expectations and the Swiss National Bank’s Quarterly Bulletin. From the US we have the latest weekly update on Crude Oil Inventories. ECB Governing council member Jens Weidmann will speak in his role as German Bundesbank President and FOMC voting member and Federal Reserve Bank of St. Louis President James Bullard will also deliver a speech.

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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