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Indices Update

European indices are lower this morning reflecting the late sell-off on Wall Street last night. US equities managed a mid-session rally yesterday. For a while it looked as if there would be limited fallout after the Bank of Japan (BOJ) decided to hold off from providing further stimulus. However, the yen has strengthened further today. The USDJPY has broken below 107.00 on a number of occasions. Precious metals continue to benefit from “risk-off” buying.

The BOJ’s decision took many investors by surprise as recent earthquakes and a bout of yen strength had been considered the perfect cover for yet another round of intervention. The Nikkei dropped over 1,000 points following the announcement. Meanwhile, the yen rallied sharply with the USDJPY briefly breaking back below 108.00. BOJ Governor Haruhiko Kuroda had said previously that the negative interest rate policy adopted in January needed time to work. Yesterday he said that he didn’t see a limit to monetary policy. However, it’s possible that investors do, although it’s more likely that they will build up expectations for further stimulus at the next big meeting at the end of July.

Almost as an aside, the US Federal Reserve kept rates on hold as expected. The accompanying FOMC statement was viewed as a touch more hawkish than the one from March, and it appeared to keep the door open for a hike in June. It was of particular note that the FOMC removed its reference to global events posing risks to their outlook.

Early on yesterday there was a divergence between the tech-heavy US NASDAQ and the Dow and S&P500. This time round it was the NASDAQ which outperformed, thanks to a strong set of results from Facebook (FB). Earlier in the week, disappointing earnings and forward guidance from Apple (AAPL) and Twitter (TWTR) had led to a sharp decline in the tech index. However, the NASDAQ suddenly lost its lead and fell back sharply thanks to renewed selling of Apple. The stock ended 3% lower after activist investor Carl Icahn revealed his fund no longer had a position in the stock.

Yesterday’s sell-off in risk assets should be a wake-up call for anyone who still believes markets are underpinned by anything other than loose monetary policy and central bank intervention. There’s a danger that investors will decide to reduce their exposure to equities over the next six weeks or so particularly as corporate earnings continue to disappoint. This would put further pressure on the Fed not to hike this summer.

The FTSE 100 index closed at 6,322.4 up 2.5 points on the day

The German DAX rose 21.3 points or 0.2% to finish at 10,321.2

The US30 closed down 210.8 points to finish at 17,830.8 The S&P 500 ended 0.9% lower at 2,075.8 while the Nasdaq 100 ended down 1.2% at 4,364.

Equities Update

Amazon (AMZN) reported after last night’s close. The company reported first-quarter net income of  $1.07 per share, on $29.13 billion in revenue. The consensus expectations were for $0.58 per share on $27.98 billion. The shares were up around 12% in after-hours trade. The company is the last of the FANG stocks (Facebook, Amazon, Netflix and Google/Alphabet) to report. These are the four stocks which drove much of the upside momentum in the major indices over the past few years. While Netflix and google disappointed, Facebook and Amazon have both come in with stellar results. 

Commodities Update

Oil was one of the few markets which showed relatively little reaction to either central bank decision. The biggest move came earlier in the day on Wednesday. Oil prices fell sharply following the latest US crude inventory data from the Energy Information Administration (EIA). This showed a build of 2 million barrels last week – slightly above the 1.4 million expected. However, both Brent and WTI recovered quickly as buyers rushed back in to take advantage of cheaper prices. Both contracts posted gains on the day and built on these yesterday as well.

Both Brent and WTI are up around 70% from their January/February lows. Crude has continued to push higher as analysts predict that supply and demand will come into balance earlier than previously calculated.

But it may become more difficult for crude to push on much higher from here. As $50 per barrel becomes a possibility, we should see mothballed US shale production come back on line. On top of this producers will sell forward contracts to lock in prices. In addition, chart-wise there’s resistance for WTI around $45.50 – the 76.4% Fibonacci Retracement of the October 2015 – February 2016 sell-off.

Gold and silver rallied sharply yesterday following the BOJ’s decision to hold off from further monetary stimulus. Both had fallen in the immediate aftermath of the US Federal Reserve’s FOMC statement earlier on. This was viewed as slightly more hawkish than the March statement leading to a small rally in the US dollar. However, the dollar slumped after the BOJ refrained from either cutting interest rates deeper into negative territory, or extending the size or scope of its QQE programme. The Dollar Index slumped below support around the 94.00 area and this helped to boost the two precious metals.

The dollar recovered some of its losses as yesterday’s trading session proceeded. However, gold and silver managed to hold on to their early gains. Gold traded around $1,260 which is an area of mild resistance. Meanwhile silver managed to push on further above $17 per ounce. Both metals have pushed higher again this morning on safe-haven demand and further dollar weakness.

Forex Update

Yesterday’s stand-out currency move was the rally in the Japanese yen. This followed the BOJ’s decision to hold off from further monetary stimulus. Many traders had expected the central bank to cut rates further into negative territory and/or increase its QQE programme, particularly given the country’s weak outlook for inflation, low growth and the damage done economically by the earthquakes from earlier in the month. However, the Japanese central bank held its nerve although Governor Haruhiko Kuroda also said that he didn’t see a limit to monetary policy. The USDJPY briefly broke back below 108.00 – falling around 3% within hours of the announcement. This yen strength adds to deflationary pressures. The position has deteriorated again this morning. At the time of writing the USDJPY is trading below 107.00 leading to a general “risk-off” move.

The next opportunity for the BOJ to provide further stimulus comes in three months’ time although there’s still a slim chance that the US Fed will hike in June and so take some of the heat out of the yen. Otherwise, there’s always the danger that the currency could make further gains, unless the BOJ decides to intervene. This may prove difficult as G20 countries have all agreed that they won’t intervene to weaken their currencies to gain a competitive advantage. Nevertheless, if the yen strengthens excessively (with the USDJPY breaking, say, 100) then the BOJ could argue that the move is “one-sided” and request permission of G20 members (specifically the US) to step in.

Yesterday we had a first look at Q1 US GDP. This showed annualised quarter-on-quarter growth of +0.5% - below the +0.7% consensus expectation. However, it is worth remembering that the Federal Reserve Bank of Atlanta predicted Q1 GDP growth to come in at just 0.3%.

Wednesday’s FOMC statement slightly increased the likelihood of a rate rise at the Fed’s next meeting in June. This is primarily due to the Committee downplaying its concerns over global risks. Nevertheless, the FOMC also noted that economic activity had slowed. Yesterday’s GDP release backs that up. 

Upcoming events

There is a bank holiday in Japan

Today’s significant economic events include UK Net Lending, M4 Money supply and Mortgage Approvals. We also have Euro zone CPI and Unemployment. From Canada we have first quarter GDP and from the US we have Core PCE, Personal Spending, Personal Income, Chicago PMI, Consumer Sentiment and Inflation Expectations.

Advance warning: on Sunday we get the latest update from China on its Manufacturing and Non-Manufacturing PMIs.

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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