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AM Bulletin: Equities and oil slip in early trade
31 Mar 2016
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11 Mar 2016
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04 Mar 2016
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02 Mar 2016
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 Wednesday 02 March 2016

AM Bulletin: Equities soar

 

 

Indices Update

European equities and US stock index futures had a softer tone first thing yesterday, in a continuation of Monday’s late US sell-off. However, they quickly recovered and bounced into positive territory despite the release of weak manufacturing data from China.

China’s main Manufacturing PMI came in at 49.0, while the Caixin Manufacturing PMI (which covers a broader range of smaller companies) posted a reading of 48.0. The two PMIs were both lower than expected and down from the prior month’s readings. They also indicated that China’s manufacturing sector was continuing to contract. Despite this, Asian Pacific stock indices ended the day higher. No doubt investors are now convinced that the data will encourage the People’s Bank of China (PBOC) to provide further monetary stimulus. On Monday the central bank cut its reserve requirement ratio (RRR) for the fifth time in a year.

Manufacturing data from across the euro zone and UK was also generally disappointing. Add in Monday’s weak US Chicago PMI and Pending Home Sales, together with the year-on-year Euro zone CPI print of -0.3% and you have plenty of evidence that the global economic outlook isn’t exactly humming along. Of course, what this all means for central bank-fixated investors is that further stimulus can’t be far away. Stock market bulls must be praying for a bad US payroll number on Friday to really kibosh the fear of further Fed rate hikes this side of summer.

The FTSE 100 index closed at 6,152.9 up 55.8 points on the day, or +0.9%

The German DAX rose 221.8 points or 2.3% to finish at 9,717.2

The US30 closed up 348.6 points to finish at 16,865.1. The S&P 500 rose 46.1 to close at 1,978.4 while the Nasdaq 100 gained 3.2% to close at 4,333.6

Equities Update

Barclays (BARC) was sharply lower in early trade yesterday. This followed the release of a set of weaker-than-expected full year results. Total income (excluding insurance claims) came in at £24.5 billion for 2015, down 5% on the previous year. Net operating income also fell 5% to £22.4 billion. Pre-tax profits were down 2% at £5.4 billion. Fines and claims continue to come in and showed a “slower than expected decline” yet Barclays kept its dividend intact at 6.5 pence per share. However, it warned that this would be reduced by at least 50% in 2016 and 2017. Barclays announced that it will be simplifying its business structure to two distinct divisions: Barclays UK – now to become a ring-fenced bank – and Barclays Corporate and International. As part of the restructuring Barclays announced that it was planning to unload its holding in its African business. The shares closed 8% lower at 158.1 pence.

Commodities Update

Once again, crude was little-changed for the early part of yesterday’s European session, although with a slightly easier bias. However prices picked up throughout the morning and WTI and Brent traded above resistance at $34 and $36 respectively. Prices are still holding above these levels this morning despite a slightly softer tone.

There’s a feeling that the low is now in for the oil price. This is despite the fact that the underlying fundamentals of the market haven’t changed, nor are about to change in the near-future. Supply looks set to exceed demand for a considerable period of time as record inventories have to be wound down. Yet investors have taken heart from the possibility of the major OPEC and non-OPEC producers working together to put a freeze on output. This may be enough to turn sentiment positive, even if they will never agree to any type of cut. However, this could be another prelude to disappointment. A number of significant oil producers are set to meet later this month. But it seems unlikely that this meeting will include the US, now arguably the world’s new swing producer. After all, it will only take another increase of $5 or so for many US shale oil producers to become viable again. And every $1 increase above there looks likely to add to supply. In this way it seems reasonable to believe that there will be a naturally-occurring cap on the oil price. Whether this turns out to be $45 or $60, we’ll have to wait and see.

Gold and silver were both firmer in early trade yesterday. Midway through the European session gold burst above resistance at $1,240 and was well on its way to the psychological important $1,250 level. Meanwhile, silver poked its head back above $15 for the first time since last Friday’s sell-off. However, neither metal was able to hold on to these early gains and both pulled back later in the session. Nevertheless, gold looks to be forming a rising pennant which is a bullish pattern and could presage further gains – once it breaks and holds above $1,240 convincingly.

The silver chart looks a bit scrappy to my eyes. It should get some support if gold does manage to rally again. However, it also looks vulnerable to further selling. If so, it should find some support around $14.60 and $14.30/40 below there.

Forex Update

Commodity currencies were back in favour yesterday with both the Canadian and Australian dollars making decent gains against the greenback. The oil price helped, as WTI and Brent both traded above resistance at $34 and $36 respectively. The Aussie also found buyers after the Reserve Bank of Australia left its headline Cash Rate unchanged at 2.0%. In some ways it was a bit surprising that the Aussie held on to its gains, given the weakness in China’s Manufacturing PMIs which continue to show contraction. On top of that, there was an unwelcome dip in the country’s Non-Manufacturing PMI as well, suggesting that the hoped-for rebalancing from manufacturing and exporting to consumer demand may not be going as well as hoped. However, in the current environment weak data is an indication that central bankers could be getting ready to provide further monetary stimulus. Anything more from the People’s Bank of China can only help Australia.

Later on the US ISM Manufacturing PMI beat the consensus expectation by quite a distance. Nevertheless, it wasn’t enough to register expansion in a sector which has been declining for over a year now. This followed the release of disappointing manufacturing data from across the euro zone and UK.

Later in the day the US dollar soared against the Japanese yen, once again trading above 114.00. This was the clearest indication that investors were back in “risk-on” mode as they sold (borrowed) the low-yielding yen and stuffed the proceeds into riskier assets such as equities.

Upcoming events

Today’s significant data releases include UK Construction PMI, Euro zone PPI, US ADP Non-Farm Employment Change and the Us Fed’s Beige Book. We also have speeches from the Bank of England’s MPC members Ben Broadbent and Jon Cunliffe.

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

Category: AM Bulletin


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