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

The Federal Reserve concluded its two-day meeting last night. As expected the US central bank kept its fed funds target band unchanged at 0.50% and under. The last time the Fed made any change to its headline rate was in December last year when it raised it by 25 basis points. Since then the central bank has vacillated between being hawkish and dovish as it continually sought to manipulate asset prices higher whenever there was a danger of a protracted stock market correction.

As far as the FOMC’s statement was concerned, analysts were split over whether it left the door open for a September rate hike or not. The Committee noted the strengthening of the labour market and also stated that the "near-term risks to the economic outlook have diminished." In other words, there have been no significant negative effects on the economy from the Brexit vote in June. This all suggests that the Fed could tighten in September. However, December still seems more likely should the Fed decide to move this year. The Fed may be unwilling to increase rates and risk destabilising financial markets ahead of the US Presidential Election in November.

On the face of it the FOMC could just stay permanently dovish. However, this would suggest that the central bank has doubts over the outlook for US economic growth. It would also raise the hackles of critics who believe that the central bank has already met one half of its dual mandate in ensuring maximum employment, and is close to achieving the second half (price stability) as inflation begins to creep up (although still below the Fed’s 2% target, as measured by the PCE). The Fed has another key objective for monetary policy and that is achieving moderate long-term interest rates. This implies rates that suit both savers and borrowers, so it’s undoubtedly fair to accuse the Fed of failing miserably on this score.

European equities and US stock index futures were firmer in early trade yesterday morning. Investors were reacting to the yen which fell sharply on renewed hopes that the Japanese government is preparing a large programme of infrastructure spending. Expectations have risen over the likelihood of additional fiscal stimulus ever since Shinzo Abe’s ruling Liberal Democratic Party won a landslide victory in upper house elections a few weeks ago. Back then, Prime Minister Abe said he was preparing a 10 trillion yen ($95 billion) spending programme. But recent speculation has over the size of the package has been as low as 3 trillion yen and as high as 30 trillion. Yesterday Prime Minister Abe said it would be 28 trillion yen. However, it is unclear if this is all fresh stimuli or includes funds already accounted for. Tomorrow morning the Bank of Japan will conclude its two-day meeting and is expected to announce further monetary stimulus. Needless to say, there’s plenty of scope for market disappointment.

The FTSE 100 index closed at 6,750.4 up 26.4 points on the day, or 0.4%

The German DAX rose 71.8 points or 0.7% to end the day at 10,319.6

The US30 closed down 1.6 points to finish at 18,472.2. The S&P 500 fell 0.1% to close at 2,166.6 while the Nasdaq 100 was up 0.7% to close at 4,702.9


Also, Apple (AAPL) posted better-than-expected earnings and revenue after Tuesday’s closing bell. Third quarter revenue came in at $42.4 billion and earnings per share at $1.42. These compare with expectations of $42.0 billion and $1.38 respectively. However, it’s worth noting that, in common with the majority of S&P 500 companies, revenues were down when compared to the same period last year ($49.6 billion) and last quarter ($50.6 billion). Nevertheless, current investor sentiment is such that the stock rallied 6.5% to post its best trading day in two years.

Taylor Wimpey (TW) said yesterday that last month's Brexit vote had made no difference to its trading. The UK housebuilder reported an increase in revenues and profit for the six months to 3rd July. The company's revenue rose 9.1% to £1.46billion, from £1.24 billion for the same period last year. Earnings per share grew to 6.6p, up 13.8% from the 5.8p reported a year ago. The share price fell sharply in the aftermath of the Brexit vote, although it made back some of these losses yesterday as it closed 6.7% higher at 154.6 pence. The firm did note that it is "still too early to assess what long term impact the EU Referendum result will have on the UK housing market".

Commodities Update

Crude staged a modest recovery in early trade yesterday. Both WTI and Brent pushed higher for most of the European session in a rally which followed a week of successive lower closes. However, prices suddenly tumbled after the Energy Information Administration (EIA) released its latest US inventory data. This showed a build of 1.7 million barrels for the week ending 22nd July. This was way above the consensus expectation of a 2.1 million drawdown, as well as the 2.3 million drop in stockpiles from the previous week. There was yet another build in gasoline stocks which rose by around half a million barrels. This provided more evidence of a gasoline glut with US inventories standing at five year highs despite July being peak driving season in the US. The news saw WTI and Brent test support around $42 and $44 per barrel respectively. If the two contracts have a couple of closes below these levels then there’s a possibility of further losses to come.

The ongoing sell-off in oil is unsettling equity markets. Less than two months ago crude was trading above $50 per barrel having nearly doubled in price since earlier in the year. This had taken some pressure off heavily-indebted US shale oil producers who had mothballed uneconomic production facilities as the oil price fell. There were hopes that the industry could recover and that producers could boost output and repay debt, or at least cover their interest payments. But that’s looking less likely now and the fear is that if oil continues to decline there will be a wave of defaults that will hit lenders hard.

Gold and silver were both modestly higher in early trade yesterday. However, both shot higher following the release of a poor set of Durable Goods numbers. The US dollar sold off on the back of the weak data as traders dialled back their expectations for a hawkish statement from the FOMC later this evening. Any signs that the US economy is faltering mean that there’s less chance of the Federal Reserve tightening monetary policy in the near future.

Ahead of the FOMC’s statement gold was trading comfortably above $1,320 and silver was holding around $20 per ounce. Both metals then rallied sharply as the Fed kept rates on hold and released a statement which was ambiguous as to the timing of future rate hikes. Some investors interpreted the FOMC statement as leaving the door open for a September hike. This was because the committee noted that the near-term risks to the US economic outlook had diminished, while the employment situation continued to improve. However, most investors now believe that there will be no tightening of monetary policy until December at the earliest. The dollar fell sharply and this helped to lift both gold and silver.

Forex Update

The US dollar was relatively steady in early trade yesterday. Investors seemed unwilling to take on too much exposure ahead of the Fed rate decision and statement. However, it sold off following the release of some poor Durable Goods numbers. Core Durable Goods (excluding transportation) fell 0.5% in June which was well below the 0.3% increase expected. It also showed a decline from the prior month which was revised down to -0.4% from -0.3%. But the headline number was even worse. When transportation was included, Durable Goods slumped 4% on expectations of a 1.1% decline. The dollar subsequently rallied after the latest update on US crude inventories showed a bigger-than-expected build and as oil sold off. However, the US dollar fell sharply following the release of the Fed’s FOMC statement. If there was any ambiguity in the statement over the likely timing of future rate hikes, then this wasn’t how currency traders interpreted it. As far as the FX market was concerned, the statement pushed back the likelihood of a rate hike to December at the earliest.

The Japanese yen fell back sharply yesterday morning. This followed news that Japanese Prime Minister Shinzo Abe was promising a fiscal stimulus package worth 28 trillion yen ($265 billion). This was at the top end of market speculation and came just a day after the Nikkei Business Daily reported that the Japanese government’s stimulus package was likely to be just 6 trillion yen ($57 billion). The USDJPY soared above 117.00 on the back of Mr Abe’s comments although it pulled back from its highs as it was unclear whether the 28 trillion yen package included stimulus which had already been announced. But the main takeaway is that the announcement of the planned spending comes just ahead of an important Bank of Japan meeting which concludes tomorrow morning. Now the pressure is on the central bank to come up with further monetary stimulus. However, it seems unlikely that this would include “Helicopter Money” (where the central bank effectively funds the government directly) as this would require a change in legislation. It is also understood that there are a number of policymakers who consider “Helicopter Money” extremely dangerous (possibly triggering hyperinflation) and a step too far.

The yen was rallying again this morning as investors dialled down their expectations for further monetary stimulus from the Bank of Japan. This could just be book squaring ahead of the announcement tomorrow morning. But it also shows that investors are hedging themselves in case the BOJ fails to deliver on their monetary policy response to Prime Minister Abe’s promise on infrastructure spending.

Upcoming events

Today’s significant economic data releases include German Preliminary CPI, German Unemployment, Spanish Unemployment and US Weekly Jobless Claims. But all eyes will be focused on tomorrow morning’s BOJ meeting. 


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Posted by David Morrison

Category: AM Bulletin

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