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18 May 2016
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 Wednesday 18 May 2016

AM Bulletin: FOMC minutes in focus

 

 
Indices Update

Global stock indices were off to a weaker start this morning following last night’s sell-off on Wall Street. Investors were rattled by a pick-up in US inflation and comments from San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart who both said that rates could be hiked two or three times this year. Neither is a voting member of the FOMC this year.

European equities were sharply higher in early trade yesterday. The rally was in response to Monday’s surge on Wall Street. The ongoing recovery in crude oil generally continues to underpin stocks while the weaker yen is also a factor in the “risk-on” trade.

But the major indices pulled back from their best levels ahead of the US open. Most noticeably, there was a dip which followed the release of US inflation data. Core CPI (excluding food & energy) came in at +0.2% as expected. However, the headline rate rose 0.4% which was well above the +0.3% month-on-month rate expected. Any uptick in inflation is considered as increasing the likelihood that the Federal Reserve will raise interest rates next month. Despite this, according to the Fed funds futures market there’s very little chance of an increase in June. Nevertheless, there remains a view that the Fed could still raise rates twice this year. If the Fed held off from raising rates next month that would suggest a move in September which is dangerously close to the Presidential Election. It seems reasonable to assume that the Fed wouldn’t want to shift rates in either direction before the election. If it did, then it runs the considerable danger of being labelled partisan – particularly as this is shaping up to be a particularly vicious contest.

It is also quite likely that the Fed is prepared to let inflation overshoot its 2% target. Consequently, any uptick now shouldn’t be considered a signal that the FOMC is getting ready to tighten.  It looks as if the central bank is more concerned with the robustness of the stock market rather than anything to do with its dual mandate.

Playing into this tonight sees the release of minutes from the FOMC’s last meeting in April. Back then the committee left rates unchanged and removed references to global risks. Hopefully we’ll now get a clearer idea of how many members favour an imminent rate hike. However, we have had some weak data releases since then (including Manufacturing PMI and Non-Farm Payrolls) and the prospect that the UK may vote to leave the EU. Consequently, market participants may not be unduly worried should the minutes prove to be more hawkish than anticipated.

The FTSE 100 index closed at 6,167.8 up 16.4 points on the day, or +0.3%

The German DAX fell 62.7 points or 0.6% to end the day at 9,890.2

The US30 closed down 180.7 points to finish at 17,530. The S&P 500 fell 19.5 to close at 2,047.2 while the Nasdaq 100 lost 1.3% to close at 4,322.6

  
Equities
 

Vodafone reported core earnings of £11.6 billion for the year ended 31 March 2016, up 2.7% year-on-year. Revenues were up 2.3% once currency movements were stripped out. The mobile phone operator recorded its first full year of growth in service revenues and core earnings since 2008. This was widely attributed to its £19 billion "Project Spring” investment in networks which is finally beginning to pay off. The company said it expects this growth to accelerate in 2017. Vodafone raised its dividend and the stock closed 1.5% higher at 227 pence. 


   
Commodities Update
 

The front month WTI contract hit a seven-month high in early trade yesterday. It had pulled back from its best levels by lunchtime (as did Brent) but it’s worth noting that both contracts are closing in on the psychologically important $50 per barrel level.

Crude’s rally over the past two weeks has been driven by a combination of supply outages and the continued decline in US production. The Canadian wildfire in Alberta's oil sands region was thought to be under control. However, it moved suddenly forcing the evacuation of thousands of people from work camps near Fort McMurray – the hub of Canadian oil sands production.

In addition, analysts now estimate that Nigeria's oil production has been cut by over 50% (Energy Aspects), as the Niger Delta Avengers carry out a growing number of attacks in the region. These acts of sabotage have led to oil output in Nigeria falling to its lowest levels in over 20 years.

Meanwhile, there are concerns that Venezuela is approaching an economic and political meltdown. The recent rally in crude looks as if it has come too late to save the country from turmoil, where political mismanagement has led to general disruption and crude production has collapsed due to power shortages.

Gold and silver were sharply lower in early trade this morning. The sell-off is a response to the US dollar which has bounced this morning on increased speculation of a June rate hike from the Fed.

The two precious metals were a touch softer in early trade yesterday. However, both precious metals subsequently rallied later in the session as the US dollar lost ground. Dollar-denominated commodities (and particularly precious metals) tend to perform well when the greenback weakens. This is because they become cheaper when valued in other currencies so are more attractive to non-dollar holders.  

The technical set-up for gold remains constructive. The first area of significant support comes in around $1,260 but even a pull-back to $1,240 wouldn’t invalidate the current uptrend. Nevertheless, gold continues to run into resistance around $1,300 and, in the absence of investors rushing into gold as a safe-haven, it will take a much weaker dollar for this level to be overcome. The Dollar Index needs to drop back below 94.00 while the EURUSD should rally up to 1.1400 or below. Meanwhile, traders are also keeping a close eye on the USDJPY. Precious metals tend to get a lift when this drops back below 109.00

The technical outlook for silver looks a bit more precarious. There’s some support around $17 per ounce but a break below here could lead to a pull-back to $16. The area around here acted as resistance back in February and March this year before silver scythed through it in early April in a rally that saw it briefly top $18.

   
Forex Update
 

The Australian dollar was one of the early movers yesterday as it rallied following the release of minutes from the Reserve Bank of Australia’s (RBA) last meeting. This was when the central bank surprised investors when it its Cash Rate by 0.25% to 1.75%. The minutes showed that the decision to cut was far closer than many had expected. The Aussie dollar rallied on the news as traders calculated that the RBA was unlikely to move again in June. Many analysts had predicted that the central bank was preparing to ease monetary policy further next month.

Yesterday’s other big mover in FX was the British pound. Sterling rallied sharply for the second consecutive session as the odds on the UK exiting the European Union (EU) lengthened. This followed the release of an ORB/Telegraph poll which showed that 55% of respondents were in favour of staying in the EU against 40% who wanted to leave. However, sterling gave back some of its gains later in the session as both the CPI and RPI showed a dip in inflation during April.

The rally in sterling was exacerbated to some extent given the large “risk premium” which has been factored into the currency. The pound sold off sharply in the three months since the beginning of December last year as investors lightened up on their holdings as a vote to leave the EU is seen as bad for sterling in the short-term.

Finally, the yen was weaker in early trade and this helped to support equities initially. However, the USDJPY pulled back from its highs after trading above 109.60 (its best level since the end of April). 

Upcoming events
 

Today’s significant data releases include UK employment data including the claimant count change and average earnings. We also have euro zone CPI. From the US we have crude oil inventories and the minutes from the FOMC’s last meeting in April. 

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

Tagged: AM Bulletin

Category: AM Bulletin


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