Incisive market commentary from David Morrison

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Dark clouds ahead?
29 Jul 2016
BOJ underwhelms – JPY soars
29 Jul 2016
PM Bulletin: BOJ look-ahead
28 Jul 2016
AM Bulletin: FOMC leaves rates unchanged
28 Jul 2016
PM Bulletin: Yen swinging wildly on stimulus talk
27 Jul 2016
AM Bulletin: Fed rate decision and FOMC statement in focus
27 Jul 2016
PM Bulletin: FOMC look-ahead (and Japanese stimulus talk)
26 Jul 2016
AM Bulletin: FOMC meeting begins today
26 Jul 2016
Platform Tours: CFD Trading - Check Open P & L
25 Jul 2016
PM Bulletin: EURUSD breaks below 1.1000
25 Jul 2016
Weekly Bulletin: Fed and BOJ in focus
25 Jul 2016
PM Bulletin: Sterling looking vulnerable again
22 Jul 2016
AM Bulletin: Stocks lower as oil weighs
22 Jul 2016
PM Bulletin: The EURUSD and the ECB
21 Jul 2016
AM Bulletin: ECB rate decision ahead
21 Jul 2016
PM Bulletin: ECB look-ahead
20 Jul 2016
AM Bulletin: Q2 earnings keep markets buoyant
20 Jul 2016
PM Bulletin: A look at the yen
19 Jul 2016
AM Bulletin: More records for US equities
19 Jul 2016
PM Bulletin: Precious metals pull back
18 Jul 2016
Weekly Bulletin: It’s all about stimulus
18 Jul 2016
PM Bulletin: European banks in trouble
15 Jul 2016
AM Bulletin: Sombre mood following Nice atrocity
15 Jul 2016
PM Bulletin: The BoE rate decision
14 Jul 2016
AM Bulletin: All eyes on Bank of England
14 Jul 2016
PM Bulletin: BoE Rate Decision in focus
13 Jul 2016
AM Bulletin: Equities drift lower after record US close
13 Jul 2016
PM Bulletin: Global indices pushing higher
12 Jul 2016
AM Bulletin: Equity rally powers on
12 Jul 2016
PM Bulletin: Fresh record high for S&P500
11 Jul 2016
Weekly Bulletin: The markets called, NFPs answered
11 Jul 2016
AM Bulletin: The calm before the storm; Markets await today’s NFPs
08 Jul 2016
PM Bulletin: Non-Farm Payroll look-ahead
07 Jul 2016
AM Bulletin: As the Fed turns dovish, the markets turn bullish
07 Jul 2016
AM Bulletin: Concerns continue as Sterling touches $1.27
06 Jul 2016
AM Bulletin: Markets open higher, weak UK Construction PMI data removes confidence
05 Jul 2016
Weekly Bulletin: Central Banks react to Brexit vote
04 Jul 2016
AM Bulletin: When Carney speaks, the markets listen
01 Jul 2016
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Indices Update

European equities and US stock index futures were firmer in early trade this morning. Investors were reacting to the yen which fell sharply on renewed hopes that the Japanese government will soon unveil a significant fiscal stimulus package. There was also a growing expectation that the Bank of Japan will announce further monetary stimulus after its two-day meeting which ends on Friday.

Also, Apple (AAPL) posted better-than-expected earnings and revenue after last night’s closing bell. The news saw the stock rally close to 7% in after-hours trading. Meanwhile Twitter’s (TWTR) earnings update was mixed with revenues coming in below expectations although earnings were better. But the stock sold off overnight due to downbeat forward guidance.

Equities had another mixed start yesterday morning as falling crude prices and a sharp rally in the Japanese yen also weighed on prices. Shortly after the open the FTSE and DAX were both modestly higher but other European indices were trading lower. The Italian MIB was worst hit as investors marked down banking stocks. This sector is back in focus now ahead of this Friday’s release of the European Banking Authority Stress Test results. Investors are increasingly concerned over the viability of the Italian banking sector given the estimated €360 billion of non-performing loans on their books. There are also concerns over the state of Germany’s Deutsche Bank.

The US Federal Reserve concludes its two-day meeting this evening. The central bank releases its FOMC statement at 19:00 BST and is widely expected to keep rates on hold. Speculation has grown recently that the Fed is once again becoming more hawkish following a recent uptick in US economic data releases. In fact some commentators are suggesting that the latest payroll and inflation numbers, together with strength in equity and bond markets, make it irresponsible for the Fed not to hike rates now. But equally, Fed members could point to other factors which suggest that a delay is sensible. There’s the added uncertainty surrounding the UK’s Brexit vote and how it may affect the economic outlook for both the Euro zone and UK. Additionally, the Fed may be unwilling to increase rates so close to the US Presidential Election for fear of destabilising financial markets ahead of a crucial political event. Finally, the US dollar is trending higher which means (because of the peg) the Chinese yuan is as well. A rate hike now would exacerbate this situation and open the door for a Chinese currency devaluation. 

The consensus expectation is that the Fed will keep rates unchanged. However, the accompanying FOMC statement will be carefully parsed for clues on the Fed’s thinking. It could be that the FOMC cranks up a hawkish bias and hints that it is preparing to raise rates at its next meeting in September. This should be dollar-positive in the short-term. But any rally could fade quickly as investors look ahead to a full two months without any danger of tighter US monetary policy. If we get a dovish statement, then a weaker dollar should follow along with a spike higher in precious metals.

In other news the Bank of England's Martin Weale said he will call for additional monetary stimulus at next week's Monetary Policy Committee (MPC) meeting. Mr Weale has previously been a lone hawk on the MPC and just over a week ago he said the Bank should wait for "firmer evidence" before implementing more monetary easing. But last Friday's poor Manufacturing and Services PMIs have convinced him that the Bank shouldn’t delay any longer.

The FTSE 100 index closed at 6,724 up 13.9 points on the day, or 0.2%

The German DAX rose 49.5 points or 0.5% to end the day at 10,247.8

The US30 closed down 19.3 points to finish at 18,473.8. The S&P 500 rose 0.7% to close at 2,169.2 while the Nasdaq 100 was up 0.1% to close at 4,672.1


BP (BP) was the first oil major to report second quarter results. Yesterday it announced a bigger-than-expected loss due to lower refining margins and a multibillion-dollar charge relating to the Gulf of Mexico disaster in 2010. According to CEO Bob Dudley this charge draws a line under the material liabilities for Deepwater Horizon oil spill. Stripping out one-off items, the company's underlying earnings fell to $720 million from $1.3 billion for the same quarter last year. BP ended the day down 1.3% at 434.6 pence.

Ahead of yesterday’s US open we saw earnings updates from McDonald’s (MCD) and Caterpillar (CAT). Shares in McDonald’s fell after the company reported revenues of $6.265 billion on expectations of $6.273 billion. This was despite an earnings per share beat of $1.45 compared to $1.38 expected. However, the second quarter included $0.20 in “strategic charges.” Meanwhile Caterpillar beat on both headline numbers. Earnings per share came in at $1.09 on revenues of $10.3 billion. This compares with expectations of $0.96 and $10.1 billion respectively.

Commodities Update

Crude came under further selling pressure yesterday morning. WTI and Brent hit their lowest levels since April and May 2016 respectively as sentiment continued to sour. There are concerns over future demand growth following the UK’s decision back in June to quit the European Union. The International Monetary Fund (IMF) recently downgraded its outlook for global economic growth although it kept its forecast for China unchanged. While it’s fair to say the IMF (along with the majority of public bodies) has a fairly dismal record when it comes to financial forecasting, their prediction appears to accord with the general murky outlook. This ties in with speculation that the BOJ, BoE and ECB are all expected to loosen monetary policy further in efforts to fight off deflationary pressures and boost tepid growth. In the past, any hint of lower interest rates or further quantitative easing has helped to lift risk assets and commodities. The difference this time is that the US Federal Reserve continues to debate tightening monetary policy. This is helping to support the dollar which keeps downside pressure on dollar-denominated commodities.

Meanwhile, there’s growing evidence of a gasoline glut with US inventories standing at five year highs. This means that refinery profit margins are in decline which leads to lower crude demand from refiners. Nevertheless, support still comes in around $42 for WTI and just below $44 for Brent.

Gold and silver steadied yesterday. Both metals have pulled back from the multi-year highs they made earlier this month thanks to a rally in the US dollar and a general increase risk appetite. Last week saw the major US stock indices make a succession of fresh record closes. However, equities slipped back from their best levels on Monday and the selling continued into yesterday’s trading session. Investors appear to be booking profits in stocks and taking some money off the table as we head into the month-end and high summer. While there have been no terrible surprises from the second quarter earnings season so far, some investors question whether the results warrant such high stock valuations. At the same time gold and silver remain attractive thanks to their safe-haven status and their increased attractiveness in a zero/negative interest environment. Investors are looking ahead to today’s Federal Reserve meeting where the central bank is expected to keep rates on hold despite a recent upturn in US economic data releases. Then there is speculation that the Bank of Japan may increase monetary stimulus following its meeting on Friday. Overall, loose monetary policy should continue to support the two precious metals. Conversely, if the Fed’s accompanying FOMC statement is more hawkish than expected (perhaps pointing to a rate hike before the year-end) then gold and silver may once again see selling.

Forex Update

Yesterday’s big currency news was the sharp rally in the Japanese yen. Early on the USDJPY briefly broke below 104.00. This followed a report in the Nikkei Business Daily that the Japanese government’s fiscal stimulus package is likely to come in around 6 trillion yen ($57 billion). If so, this would be seen as disappointing. Just a few weeks ago, following the ruling Liberal Democratic Party’s sweeping electoral victory in the upper house, Prime Minister Shinzo Abe suggested that 10 trillion yen ($95 billion) was being earmarked for infrastructure projects. Then there were whispers that this could go as high as 20 trillion yen ($190 billion). Now investors are downgrading their expectations for fiscal stimulus. In addition, they’re factoring in the possibility that the BOJ may come up short on monetary stimulus at the conclusion of its two-day meeting this Friday. This led to investors trimming back their short yen positions.

The US dollar slipped against a basket of currencies. The Dollar Index briefly fell back below 97.00 after hitting its highest level since early March at the beginning of this week. The US Federal Reserve is widely expected to keep rates on hold tonight. This is despite recent speculation that the Fed is becoming more hawkish following a recent uptick in US economic data releases. The latest payroll and inflation numbers, together with strength in equity and bond markets, have led some analysts to opine that it would be irresponsible of the Fed not to hike rates now. On the flip side the Fed can point to the uncertainty surrounding the UK’s Brexit vote and how it may affect the economic outlook for both the Euro zone and UK. Additionally, the Fed won’t want to risk destabilising financial markets ahead of the US Presidential Election. Meanwhile, a rate hike now would send the dollar soaring which would put enormous pressure on China’s yuan/dollar peg.

Upcoming events

Today’s main event is the release of the FOMC statement and US Federal Reserve rate decision at 19:00 BST tonight. Before that from the UK we have Preliminary GDP, Realised Sales and Index of Services. From the US we also have Durable Goods, Pending Home Sales and Crude Oil Inventories. 


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Posted by David Morrison

Category: AM Bulletin

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