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 Thursday 14 April 2016

AM Bulletin: Equities push higher

 

 

Indices Update

European equities were sharply higher in early trade this morning. Partly they were playing catch-up after last night’s strong close on Wall Street. But they were also reacting to Asian Pacific markets which ended up overnight following better-than-expected Chinese trade data.

It was a mixed start for European equities and US stock indices yesterday morning. The majors struggled to push higher despite a modest recovery after the previous evening’s reversal in the US. This saw the Dow give back gains of 150 points to end Monday slightly lower. Oil prices continued to be supportive, but investors were still wary of taking on too much long-side exposure given the yen’s continued strength and ahead of the first quarter earnings season. Alcoa (AA) unofficially marked the start of the US earnings season and posted better-than-expected earnings, but disappointing revenues. Nevertheless, the company has lost much of its importance as a barometer of US economic health. JP Morgan’s earnings which are due out later today will be studied more keenly.

European and US indices bounced off their lows as yesterday’s trading session progressed. Despite this the Italian MIB was still down sharply and giving back all its gains and more from Monday. There are still concerns over the health of the Italian banking system which is being crippled by €360 billion of non-performing loans. There had been hopes that the pressure would be alleviated by an agreement between Italian banks, insurers and asset managers to provide a €5 billion fund to backstop the loans. But analysts have cast doubt over the deal, doubting that it is anywhere near big enough to shore up confidence in the sector.

But overall investors took heart from the continued bounce in oil and a pull-back in the Japanese yen. Nevertheless, the USDJPY is still well below the 110 level it broke at the end of last week and so is still in the danger zone. Meanwhile, there is always a risk that this Sunday’s meeting of OPEC and non-OPEC oil producers in Doha ends without an agreement to freeze output.

The FTSE 100 index closed at 6,242.4 up 42.3 points on the day, or 0.7%

The German DAX rose 78.5 points or 0.8% to finish at 9,761.5

The US30 closed up 164.8 points to finish at 17,721.3 The S&P 500 rose just under 1% to close at 2,061.7 while the Nasdaq 100 gained 0.8% to close at 4,496

Equities Update

Anglo American (AAL) topped the FTSE100 leader board and ended the day 9.1% higher at 638.7 pence. The move came amid gains for the mining sector as a whole, although Anglo also reported an increase in rough diamond sales.

Luxury goods and fashion house Burberry (BRBY) fell sharply in early trade yesterday. This followed the release of disappointing results from sector rival LVMH. However, Burberry rallied later in the day to close 0.3% higher at 1,301 pence. 

Commodities Update

Crude oil rallied sharply yesterday. Both WTI and Brent pushed further above $40 per barrel and Brent hit its highest level since early December. The gains came following a report via Bloomberg that Saudi Arabia and Russia will agree to a production freeze, irrespective of Iran’s decision to participate in such an action. In addition, Iraq's OPEC governor Falah Alamri appeared to back the plan to freeze output saying of such an agreement that "this is the only way" to boost crude prices. Oil also got support from data which showed an increase in Chinese vehicle sales and on a story that Kuwaiti oil and gas workers were planning a strike from Sunday.

Yesterday afternoon gold pulled back from highs made earlier in the day. Gold has been making solid gains ever since it broke back above $1,240 at the end of last week. This is a level which has acted as resistance on a number of occasions in the past, and a close above here on Friday was a trigger for further buying. Gold came within a whisker of $1,260 on Monday but spent most of yesterday drifting lower. Traders blamed a small rally in the US dollar as a catalyst for mild profit-taking.

Meanwhile, silver had another solid session and capitalised on Monday’s surge. Yesterday it pushed further above $16 to hit its best intra-day levels since the end of October last year. By some measures silver has lagged behind gold in recent months. Even after Monday’s move which saw silver add close to 4%, it is up around 16% since its low point in December. Gold is currently up around 19% over the same period. Of course, silver fell around 72% from its 2011 highs to its lows last December compared with a 45% decline for gold. While both precious metals have benefited from the adoption of negative interest rates from central banks and their safe-haven status, investors have been wary of taking on too much exposure to silver. This is due to its use as an industrial metal as it could suffer from a slowdown in demand on global growth worries. 

Forex Update

The US dollar was mixed during yesterday’s trade. It was modestly higher against the euro and Swiss franc for most of the session and sharply lower against the Canadian dollar. The “Loonie” continues to make steady gains thanks to the ongoing rally in oil. The USDCAD is down around 12% since the end of January. Brent crude is up over 62% over the same period.

Meanwhile the Japanese yen finally managed to pull back from recent highs. The USDJPY has rallied back above 108.50 and topped 109.00 overnight, putting in its best performance since the third week of March. The move will come as a relief to Japan’s policymakers, but the currency is not out of the danger zone. Many analysts still don’t believe that the Bank of Japan (BOJ) will intervene yet to drive the yen lower. The BOJ will be unwilling to intervene in case such a move proves to be short-lived and ineffective. A straw-poll of analysts suggested that the USDJPY would have to fall to 100.00 before the BOJ would be prepared (or allowed) to take unilateral action. However, according to some banking models fair value for the USDJPY comes in around 97.00. This suggests that the yen would have to rise well over 8% before it could seriously be considered as overvalued.

Earlier in yesterday’s session we had UK inflation data. Core CPI (excluding food & energy) was sharply higher, coming in at +1.5% year-on-year versus 1.3% expected. Headline CPI was also higher than anticipated at +0.5% versus the +0.3% consensus expectation. Sterling rallied on the news building on the modest recovery it has enjoyed over the past few days. However, it’s worth remembering that just over a month ago cable was trading at its lowest level since March 2009 at the nadir of the financial crisis. The British pound hasn’t had much joy as far as the euro is concerned either. Last week it hit its lowest level since June 2014. Investors are understandably nervous ahead of the UK referendum. However, there is some speculation that sterling could soar if the UK votes to stay in Europe. Once the uncertainty is over, some analysts believe inflation will come properly into focus forcing the Bank to raise base rates by the end of this year.

In other news the International Monetary Fund (IMF) downgraded its world economic growth forecast again. The IMF said it now expects the global economy to grow by 3.2% in 2016— 0.2% down from its January forecast.

Upcoming events

Today’s significant economic events include the Bank of England’s Credit Conditions Survey, Euro zone Industrial Production and the Bank of Canada’s rate decision and Monetary Policy Report. From the US we have Retail Sales, PPI, Business Inventories and Crude Oil Inventories.  


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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