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01 Jun 2016
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 Wednesday 01 June 2016

AM Bulletin: Manufacturing PMIs in focus

 

 

Indices Update
 

There’s a weaker tone to European equities this morning following last night’s sell-off on Wall Street. All the major US indices ended lower on the last trading day of May, although they managed to bounce off their lows.

Overnight brought the release of Chinese PMIs. These were a bit of a mixed bag with Caixin Manufacturing slipping further into contractionary territory while the headline number was unchanged from last month. China’s Non-Manufacturing PMI dipped to 53.1 from 53.5 previously.

Today brings a large dump of data with manufacturing PMIs from across the Euro zone, UK and US. The latter reading is particularly important as an improvement in US manufacturing will increase the likelihood of a Fed rate hike this summer.

Japanese Prime Minister Shinzo Abe is set to attend a press conference this morning.  He has already signalled his intention to postpone next year’s much-heralded sales tax rise. However, it is also being suggested that Mr Abe will announce a snap election.

Delaying the tax increase would mean less income for the government. But policymakers are concerned that adding to the tax burden now (by effectively raising Japan’s own VAT) will impact consumer spending. It certainly did when it was raised two years ago. Japan’s consumption tax was increased for the first time in 17 years to 8% from 5% in April 2014. Back then the plan was to raise it again to 10% in October 2015 but this was cancelled after the first hike led to a plunge in consumer spending.

 However, there is a danger that delaying the tax increase may lead to a downgrade to Japan's sovereign rating. In addition, ditching the proposed tax suggests that Mr Abe’s policies to turn around Japan’s economy have been a dismal failure. Meanwhile Japan is expected to compile a supplementary budget in an effort to finally stimulate its moribund economy. This should come ahead of the Bank of Japan’s meeting later this month which is expected to yield up further monetary stimulus.

Yesterday there was a flash-crash on Chinese stock futures. CSI 300 Index futures suddenly plunged over 12.5% but recovered almost all of the losses within a minute. Fortunately the main cash index was unaffected. However, the flash-crash follows a similar move on the Hang Seng China Enterprises Index futures earlier this month. Put together (and remembering the Chinese market melt-down and subsequent panic by the authorities) these events can only raise concerns amongst investors, particularly on the Chinese mainland.

However, the main Shanghai Composite ended yesterday’s session over 3% higher. This bounce-back was attributed to stories that MSCI was considering adding mainland shares to its international indices. The final decision will be announced on 14th June. Overnight the Shanghai comp ended effectively unchanged, despite those uninspiring PMI numbers.

The FTSE 100 index closed at 6,230.8 down 40 points on the day, or 0.6%

The German DAX fell 70.5 points or 0.7% to end the day at 10,262.7

The US30 closed down 86 points to finish at 17,787.2. The S&P 500 lost 0.1% to close at 2,097 while the Nasdaq 100 gained 0.3% to close at 4,523.9


Equities

The Volkswagen (VOW) stock price ended down 1.8% at €138.75 yesterday. The giant car manufacturer reported pre-tax profits of €3.2 billion for the first quarter compared with €3.97 billion for the same period last year. The 20% slump shows the damage done by the emissions scandal which engulfed the company last year. Over the same period sales fell to €51 billion which were down 3.4%.  


Commodities Update
 

Both WTI and Brent crude continue to hover around the psychologically important $50 per barrel level. However, both Brent and WTI pulled back sharply from here late in yesterday’s trading session. As mentioned earlier this week Iraq has announced an increase in its export quota. The OPEC member is set to supply an extra 5 million barrels of crude to its trading partners in June. Iraq joins other producers (both OPEC and non-OPEC) who are set to increase output over the coming months. This is despite comments from Iraq's Deputy Oil Minister, Fayyad Al-Nima, who said that OPEC members would discuss an output freeze at this week’s biannual meeting.

However, things are likely to remain frosty this week between OPEC members, particularly Saudi Arabia and Iran. In fact, relations have deteriorated considerably since Khalid al-Falih replaced Ali al-Naimi as Saudi Arabia’s oil minister. Back in September Mr al-Falih blamed pilgrims to Mecca for the tragedy which left two thousand dead, including estimates of 500 Iranian visitors. Iran has just announced a ban on its citizens attending this year’s Hajj. It will be remembered that the two countries clashed earlier this year ahead of the meeting in Doha where an OPEC/non-OPEC output freeze was discussed and rejected.

The bottom line is that Saudi Arabia, Iran, Iraq, Russia and any other oil producer you care to mention is now going all-out to boost production as much as they can. This is hardly surprising with oil now trading at its best levels in nearly eight months. So there’s really very little chance this week of any agreement being reached to freeze output, let alone cut it.

Gold and silver fell sharply last week thanks to US dollar strength. The dollar rallied following comments from a number of Federal Reserve members which all helped to boost the likelihood of a US rate hike over the summer. This hawkish rhetoric was rounded off on Friday when Fed Chairman Janet Yellen made some brief comments on US monetary policy. She said that it was probably appropriate for the Fed to gradually and cautiously increase the overnight interest rate in the coming months. Gold had already broken below support around $1,220 but Mrs Yellen’s apparent backing of a summer hike, along with low volume holiday trade on Monday led to further losses. Gold tested (and briefly broke) support around $1,200 while silver slipped under $16 per ounce. However, both metals bounced back yesterday. It appeared that investors felt the sell-off in precious metals had been overdone and were confident enough to take on some upside risk. It helped that the dollar was weaker against both the euro and Japanese yen. 


Forex Update
 

The dollar was mixed yesterday. It was little-changed against the euro and Swiss franc, stronger against the Canadian dollar and weaker against the yen. Most of yesterday’s FX moves appeared to be profit-taking and position adjusting ahead of the month-end. The dollar’s pull-back against the Japanese yen comes a day after the USDJPY hit a one month high.

However, yesterday’s biggest mover was the British pound which fell sharply in the afternoon session. Sterling’s sell-off followed the release of two polls on the UK’s referendum on EU membership. Both showed a lead for the “leave” campaign. These two polls go against the recent trend which has shown the “remain” campaign build a healthy lead. If this had just been one poll on its own then the effect on financial markets would have been minimal. However, there was a phone poll showing 45% wanting to leave and 42% remain, with 13% undecided. Then an online survey showed 47% in favour of leaving, 44% remain and 9% undecided. At the same time, Ladbrokes and William Hill both reported a big increase in money being staked on “leave.”

On Monday St. Louis Fed President James Bullard said that global markets appeared to be "well-prepared" for a summer interest rate hike. His comments followed on from those of Federal Reserve Chairman Janet Yellen at the end of last week. Both FOMC members have helped to add gravitas in the central bank’s desperation to keep live the prospect of a summer rate hike.


Upcoming events

Today’s significant economic releases include Manufacturing PMIs from the US, UK and across the Euro zone. 
 
 
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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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