Incisive market commentary from David Morrison

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Weekly Bulletin: Equity rally continues
29 Feb 2016
PM Bulletin: Chart for the EURUSD
29 Feb 2016
AM Bulletin: Auction postponement linked to risk rally
26 Feb 2016
PM Bulletin: FOMC members add to confusion over monetary policy
26 Feb 2016
AM Bulletin: US stock indices rebound
25 Feb 2016
PM Bulletin: Lloyds Banking Group
25 Feb 2016
AM Bulletin: Stocks slip on lower crude
24 Feb 2016
PM Bulletin: Gold
24 Feb 2016
PM Bulletin: Crude oil, yen and equities
23 Feb 2016
AM Bulletin: Equities slip after strong start to week
23 Feb 2016
Sterling dumps on Brexit fears
22 Feb 2016
AM Bulletin: Stronger start for global equities
22 Feb 2016
AM Bulletin: Netflix leads Nasdaq lower
19 Feb 2016
PM Bulletin: FTSE revisited
18 Feb 2016
AM Bulletin: Oil still leading equities
18 Feb 2016
PM Bulletin: The yen, Nikkei and negative interest rates
17 Feb 2016
AM Bulletin: Oil and FOMC minutes in focus
17 Feb 2016
PM Bulletin: WTI and Brent
16 Feb 2016
AM Bulletin: Equities, USD, oil rally while precious metals slide
16 Feb 2016
Weekly Bulletin: Yellen keeps us guessing
15 Feb 2016
PM Bulletin: A multi-year look at the FTSE100
15 Feb 2016
PM Bulletin: Andrews’ Pitchfork on S&P500
12 Feb 2016
AM Bulletin: Equities remain vulnerable to further selling
12 Feb 2016
PM Bulletin: EURUSD – what now?
11 Feb 2016
AM Bulletin: Yellen fails to calm nerves
11 Feb 2016
PM Bulletin: Yellen steers through Clashing Rocks
10 Feb 2016
AM Bulletin: Yellen testimony in focus
10 Feb 2016
PM Bulletin: Japanese sell-off spooks investors
09 Feb 2016
AM Bulletin: Investors nervous as crude flirts with $30
09 Feb 2016
PM Bulletin: Big “risk-off” moves to start the week
08 Feb 2016
Weekly Bulletin: Investor jitters raises volatility
08 Feb 2016
February: Non Farm Payrolls Out Today
05 Feb 2016
PM Bulletin: Big miss for Non-Farm Payrolls
05 Feb 2016
AM Bulletin: Non-Farm Friday
05 Feb 2016
PM Bulletin: Non-Farm Payroll look-ahead
04 Feb 2016
AM Bulletin: Dollar slumps; oil spikes
04 Feb 2016
PM Bulletin: Tomorrow’s MPC press conference in focus
03 Feb 2016
AM Bulletin: Weaker crude weighs on equities
03 Feb 2016
PM Bulletin: A look at the EURUSD
02 Feb 2016
AM Bulletin: Google can’t lift indices
02 Feb 2016
PM Bulletin: Charts for USDJPY
01 Feb 2016
Weekly Bulletin: Central banks respond to sell-off
01 Feb 2016
Expand January <span class='blogcount'>(39)</span>January (39)


Indices Update

European equities and US stock index futures were firmer on early trade on Friday, making back some of their losses from the previous day. Investors took an overnight rally in crude oil as an excuse to cover short equity positions. The bulls hope that this may prove to be a turning point with fresh buying helping to end the week in a positive fashion. But that’s probably just wishful thinking.

All eyes and ears were trained on Janet Yellen yesterday as she gave her testimony before the Senate Banking Committee. This was somewhat unusual as historically day-two of the Fed Head’s grilling by policymakers is generally seen as a straightforward rerun of the previous day’s event. But the market reaction to Mrs Yellen’s statement to Congress and subsequent questioning had many traders wondering if the Fed Chair would qualify some of her downbeat comments about the global economy. But it appeared that the damage had already been done.

But while it’s the case that investors felt let-down by Yellen’s double testimony, it’s worth asking what did they honestly expect? As far as the global economy is concerned she’s only telling it as the FOMC sees it. And apparently they see it just the same as everyone else. There are concerns about the global economy – there’s no hiding them. In addition, Mrs Yellen is hardly going to come out more than a month before an FOMC meeting and say there’s no chance of a rate hike. If she did there wouldn’t be any point in holding such meetings.

The best guide is to look at what the bond market is saying. Yesterday the yield on the 10-year US Treasury dropped to its lowest level since September 2012. Meanwhile the Fed Funds futures market now doesn’t expect any rate increase until the third quarter of 2017.

The FTSE 100 index closed at 5,537 points on the day, down 2.4%

The German DAX fell 264.4 points or 2.9% to finish at 8,752.9

The US30 closed down 254.6 points to finish at 15,660.2 The S&P 500 ended at 1,829.1 down 1.2% while the Nasdaq 100 fell 0.1% to close at 3,962.2

Equities Update

PepsiCo (PEP) is one of the US’s biggest food and beverage conglomerates. It has a market capitalisation of around $142 billion which means it ranks 27th in the list of largest US companies by market cap, a bit behind Coca-Cola (KO) which ranks 18th with a valuation of $185 billion. What is worth noting is how well the two companies have held up amid the current equity sell-off. Both stocks are down around 4% so far this year. The Dow Jones Industrial Average is down 10% over the same period.

Yesterday PepsiCo reported better-than-expected quarterly net revenue. Net income for the fourth quarter rose to $1.72 billion or $1.17 per share from $1.31 billion or $0.87 per share for the same time last year. Net revenue fell 7% to $18.59 billion, but the consensus expectation had been for $18.51 billion. The stock ended the day 0.4% higher at $97.25

Commodities Update

Crude oil continued to decline yesterday. Front month WTI hit a fresh multi-year intra-day low early in the session. Brent briefly broke back below $30 per barrel for the first time since 26th January. Both contracts are firmer in early trade this morning. Once again, there are stories floating around that some OPEC and key non-OPEC countries are trying to reach agreement over a production “freeze.” Good luck with that one.

Concerns are growing over the increase in crude oil inventories. The Energy Information Administration noted this week that: “Crude oil and petroleum product inventories, both domestically and internationally, have been growing since mid-2014 and are above five-year averages for this date.” Zero Hedge ran a story this week highlighting how the US was running out of storage capacity for surplus inventory. The site referenced back to recent comments from BP CEO Bill Dudley who said: "We are very bearish for the first half of the year….In the second half, every tank and swimming pool in the world is going to fill and fundamentals are going to kick in."

Added to this are the usual concerns of a slowdown in global demand growth (exacerbated by Janet Yellen’s downbeat comments in her testimony), and the likelihood that additional crude oil supply could soon hit the market (Iran mainly).

Gold and silver powered higher in early trade yesterday. Investors hoovered up the two precious metals and took gold to its highest level in over a year. Last time gold was trading at $1,250 it was in what may prove to be the last throes of a major sell-off. This saw it slump from just over $1,900 in August 2011 to a fraction below $1,050 in December 2015. Gold bulls are now hoping that the low of December last year may prove to be the low of the four and a half year sell-off.

Recent dollar weakness has played a large part in the precious metals rally, and overall gold and silver are getting a boost from the prospect of the US Federal Reserve holding off from hiking rates this year. That is what the fed funds futures market is suggesting anyway. If that turns out to be incorrect, and the FOMC goes ahead with its projected rate hike next month, then the two precious metals could come off as quickly as they rose.

Forex Update

The Japanese yen continues to soar. The USDJPY briefly broke below 111.00 to trade at its lowest level since the third quarter of 2014. The next significant support level is 110.00. This latest move is an absolute disaster for the BOJ and its Governor Haruhiko Kuroda. They have done just about everything to weaken the yen including taking interest rates negative. It will be interesting to see if there is any intervention from the Bank of Japan (BOJ) and if so will they move soon or hold off to see how the currency behaves at a key technical level? But the problem for the BOJ is that this is just as much about dollar weakness as yen strength. Investors have dialled back their expectations for further rate hikes from the Federal Reserve. This comes on concerns over the outlook for the global economy and stresses in the banking system. There is a fear that the negative interest rates employed by a growing band of central banks to boost economic growth are now undermining the health of banks.

In addition, investors are buying back the yen they initially borrowed at low rates to finance riskier trades with higher yields. As investors bail out of equities (particularly leveraged positions) they end up buying back borrowed yen.

Meanwhile the Swedish Riksbank cut rates further into negative territory. They dropped their key rate to - 0.5% from -0.35%. The Swedish krona fell sharply on the news. The trouble for Sweden is that their economy is bowling along at a decent clip, yet inflation is virtually non-existent. Perhaps all central banks should back off from their ridiculous inflation targeting. Instead they should consider the damage they have done elsewhere in inflating asset bubbles, ensuring the misdirection of capital and contributing to inequality generally.

One interesting consideration about the current dollar sell-off is that it has a similar effect to loosening US monetary policy. It is inflationary as it makes imports more expensive and exports cheaper. A weaker dollar should also take some of the pressure off emerging economies who’ve taken on large amounts of dollar-denominated debt. However, it hasn’t helped to boost oil prices yet, and we would really need to see a sustained sell-off and a significant move lower to have a noticeable effect.

Upcoming events

Today’s significant data releases include ECOFIN meetings, Euro zone Flash GDP and Industrial Production. From the US we have retail Sales, Import Prices, Consumer Sentiment, Inflation Expectations and Business Inventories. Federal Reserve Bank of New York President William Dudley will also be speaking.


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Posted by David Morrison

Category: AM Bulletin

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