Incisive market commentary from David Morrison

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PM Bulletin: Gold
29 Jan 2016
AM Bulletin: BOJ takes rate negative
29 Jan 2016
PM Bulletin: BOJ in focus
28 Jan 2016
AM Bulletin: FOMC disappoints, but earnings offer support
28 Jan 2016
PM Bulletin: Facebook reports after the close
27 Jan 2016
AM Bulletin: Crude still driving equities
27 Jan 2016
PM Bulletin: Tomorrow’s FOMC meeting
26 Jan 2016
AM Bulletin: Equities slide on crude sell-off
26 Jan 2016
PM Bulletin: Silver chart
25 Jan 2016
Weekly Bulletin: Promise of further stimulus halts equity slide
25 Jan 2016
PM Bulletin: EURUSD chart
22 Jan 2016
AM Bulletin: Equities rally on ECB and oil
22 Jan 2016
PM Bulletin: Dovish Draghi triggers euro sell-off
21 Jan 2016
AM Bulletin: ECB meeting in focus
21 Jan 2016
PM Bulletin: Crude makes fresh multi-year lows
20 Jan 2016
AM Bulletin: Stocks slide as oil slumps
20 Jan 2016
PM Bulletin: Bank of Canada rate decision
19 Jan 2016
AM Bulletin: Equities surge on relief rally
19 Jan 2016
PM Bulletin: Crude oil - long-term charts
18 Jan 2016
Weekly Bulletin: China and oil weigh on equities
18 Jan 2016
PM Bulletin: Long-term gold bullion chart
15 Jan 2016
AM Bulletin: More woe from China
15 Jan 2016
Holiday Schedule: Martin Luther King Day Monday 18th January 2016
14 Jan 2016
PM Bulletin: Equities: bull or bear?
14 Jan 2016
AM Bulletin: Investors remain jittery
14 Jan 2016
PM Bulletin: The Bank’s rate decision
13 Jan 2016
AM Bulletin: Oil rebound lifts stocks
13 Jan 2016
PM Bulletin: Saudi Aramco’s IPO
12 Jan 2016
AM Bulletin: Crude closes in on $30
12 Jan 2016
PM Bulletin: US Fourth Quarter Earnings Season
11 Jan 2016
Weekly Bulletin: 2016: Trouble ahead?
11 Jan 2016
January: Non Farm Payrolls Out Today
08 Jan 2016
PM Bulletin: Another blow-out payroll number
08 Jan 2016
AM Bulletin: China effect calms markets
08 Jan 2016
PM Bulletin: Non-Farm Payroll look-ahead
07 Jan 2016
AM Bulletin: Equities slump after 2nd China trading halt
07 Jan 2016
AM Bulletin: Investors remain jittery
06 Jan 2016
AM Bulletin: China steadies and Europe rallies
05 Jan 2016
AM Bulletin: Chinese equities plunge
04 Jan 2016


Indices Update

Overnight the Chinese stock market shut down early for the second time this week. The major indices fell 7% and triggered circuit-breakers which halted trading for the rest of the session. The catalyst seems to have been the fixing of the yuan. The People’s Bank of China set the yuan’s midpoint at 6.5646 to the dollar, which was 0.5% lower than Wednesday’s fix. Not only was this the biggest drop between daily fixings since the 3% devaluation in August, but it is also marked the yuan’s lowest level against the US dollar for three and a half years. European equities have fallen sharply again this morning, while US stock index futures are also pointing to a much weaker open. As yesterday, crude oil has come under intense selling pressure with both Brent and WTI getting ever-closer to $30 per barrel.

Yesterday, European and US stock indices also fell sharply in early trade. This had little to do with the news that North Korea had carried out a hydrogen bomb test (as reported on some newswires), and much to do with the ongoing sell-off in crude. By midday UK time, Brent was down over 4% as investors fretted about the outlook for the global economy, given generally disappointing Manufacturing and Services PMIs from around the world. China’s Caixin Services PMI for December fell to 50.2 – well below the 52.3 level anticipated and barely registering expansion. This followed on from weak readings for the manufacturing sector, suggesting that the Middle Kingdom’s efforts to rebalance its economy are not having the desired effect. In addition the Chinese yuan (both onshore and particularly offshore) fell again, and this had many investors concerned that cheaper Chinese exports would lead to further deflationary pressures worldwide.

Despite the poor economic data, China’s Shanghai Composite ended 2% higher on Wednesday morning. Investors were relieved to find that the authorities are still prepared to step in and buy equities at the first sniff of a sell-off. In addition, it now looks as if officials will extend the ban on share sales by large investors. The 6-month ban was due to expire this Friday. It will be interesting to see what the Chinese authorities do now in an attempt to restore confidence and encourage buying. So far they appear to be keener to ban investors from selling than creating a proper fully functioning market. It is worth remembering that there are certain times when the authorities are unable to act, and others (even more dangerous) when their interventions fail to have any effect.

The FTSE 100 index closed at 6,073.4 down 63.9 points on the day or 1.0%

The German DAX fell 92.8 points or 0.9% to finish at 10,217.3

The US30 closed down 252.2 points to finish at 16,906.5 The S&P 500 ended at 1,990.3 down 26.5 points or 1.3% while the Nasdaq 100 fell 0.9% to close just below 4,444

Equities Update

It was another grim day for mining stocks. Concerns over the state of the Chinese economy and falling commodity prices saw some of the FTSE100’s big beasts get clobbered again. BHP Billiton (BLT) was the index’s biggest loser closing down 4.9% at 709.4 pence. However, it was closely followed by Rio Tinto (RIO) off 4.8% at 1846.5 pence; Anglo American (AAL) which fell 4.5% to end at 270.4 pence and Antofagasta which ended at 433.7 pence down just under 3%.

Commodities Update

This has been an extraordinary start to the New Year as far as the oil market is concerned. Yesterday crude fell to its lowest levels in over eleven years with Brent down over 4% by midday UK time. It has fallen another 4% this morning with both Brent and WTI getting ever closer to $30 per barrel, despite a significant increase in geopolitical tensions. If we think back to Monday, oil was up over 1% in early trade after Saudi Arabia cut diplomatic ties with fellow OPEC member Iran. But it quickly ceded these gains as weak Chinese manufacturing data played into the overriding supply/demand fundamentals. As noted many times before, the world is currently awash with oil, particularly now that OPEC not only declined to cut output at its December meeting, but also ditched its (notional) 30 million barrels per day production ceiling. Meanwhile, global demand growth is predicted to moderate over the coming year. The news that Chinese manufacturing is contracting at a faster rate than previously anticipated has only raised concerns that inventories are set to rise further.

US crude oil inventories showed a drop of 5.1 million barrels against an expected 500,000 barrel increase. However, the headline news failed to lift the price due to a huge build in the gasoline and distillate numbers.

Another feature of the oil market is that Brent has completely surrendered its premium over WTI with both contracts trading within a few cents of each other. Brent is the main reference price for crude and has traded at a premium to West Texas Intermediate (WTI) in recent years. This is due to fracking and other technological developments which make it cheaper to produce WTI than Brent. However, the spread between the two has been shrinking thanks mainly to falling prices and the lifting on the 40-year ban on US crude exports.

Gold had another good day yesterday. Once again it behaved precisely as it should do when investors are nervous and looking for a safe haven. And there is plenty for investors to worry about currently with rising geopolitical tensions across the Middle East, uncertainty over the state of the Chinese economy and the robustness (or otherwise) of China’s stock market, the corresponding sell-off in global equity markets, the fragility of the US junk bond market and even a North Korean H-bomb test getting thrown into the mix. However, as we have seen so many times over the last few years, gold’s gains can evaporate as quickly as they appear. It needs to hold and consolidate above the mid $1,080’s where it was trading a month ago for it to have any chance of pushing higher.

Forex Update

Currencies were mixed yesterday. The EURUSD pair had a quieter trading session than earlier in the week as the euro finally picked up some buying interest just above the 1.0700 area. The Euro zone Services PMI came in at 54.2 rather than the 53.9 expected. Germany's Services PMI was even stronger coming in at 56.0 up from the prior month’s 55.4 reading. This was the highest reading in nearly eighteen months, although these good numbers were offset somewhat by disappointing PMIs from France and Spain.

Commodity currencies were big movers once again. The Canadian dollar continues its downtrend thanks to falling oil prices and hit a fresh multi-year low against the US dollar. Meanwhile the Aussie dollar fell sharply for the third consecutive session as investors expressed their concerns about the Chinese economy. Yesterday saw China’s Services PMI follow earlier manufacturing data to come in below expectations. This has serious implications for the Australian economy as the country is China’s biggest trading partner when it comes to exporting raw materials such as iron ore for steel production. In addition, investors were rattled by the news that the People’s Bank of China (PBOC) fixed the yuan at a fresh five-year low yesterday and at a level well below that expected by their normal operations. The cheaper yuan makes Chinese exports cheaper and so adds to deflationary pressures in the euro zone and elsewhere.

Upcoming events

The economic calendar is relatively light today so tomorrow’s US Non-Farm Payroll release will still be the focus for traders. Today’s significant data releases include Italian and Euro zone Unemployment, Euro zone Retail Sales and US Weekly Jobless Claims.


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

Category: AM Bulletin

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