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

There’s a weaker tone to equity markets this morning with all the major European indices trading in negative territory. Wall Street eked out modest gains last night but these were enough to take both the S&P500 and Dow to fresh record closes. Crude oil continues to head lower and this may encourage some investors to book profits from global equities which have enjoyed a stunning rally following their post-Brexit sell-off. But despite ongoing concerns about the state of the global economic outlook, investors continue to climb the “wall of worry” and push money into equities and bonds. They have been encouraged to do so by hopes of further central bank monetary stimulus and by a strong showing by US banks as the second quarter earnings season picks up steam.

There was also some encouraging news concerning the Italian banking sector. It is understood that the government is hoping to set up a €50B bailout fund for bad banks. This could help shore up the sector which is being weighed down by around €360 billion in non-performing loans which could quickly go bad. JP Morgan is understood to be behind the scheme, although there are still issues with the EU which recently brought in laws prohibiting taxpayers bailing out banks before private investors take a hit.

European equity markets ended mixed yesterday. This was despite the surprise news that Japan’s SoftBank had made a successful bid for UK chip designer Arm Holdings. The news initially led to a widespread rally as investors cheered on this major deal for a UK company as it came so quickly after the Brexit vote. The expectation had been that investors would turn their collective backs on the UK if it was no longer part of the European Union. But SoftBank’s CEO and Chairman Masayoshi Son said that the Brexit vote wasn’t a consideration. Instead the head of the Japanese telecoms giant said the decision to acquire Arm Holdings was about taking advantage of the "paradigm shift" he sees in the Internet of Things.

The FTSE 100 index closed at 6,695.4 up 26.2 points on the day, or 0.4%

The German DAX fell 3.8 points or 0.04% to end the day at 10,063.1

The US30 closed up 16.5 points to finish at 18,533.1. The S&P 500 rose 0.24% to close at 2,166.9 while the Nasdaq 100 rose 0.7% to close at 4,619.7


Equity markets got a shot in the arm yesterday on the news that the directors of Arm Holdings (ARM) were recommending that its shareholders accepted the £24.3B ($32B) bid from Japan’s SoftBank (SFTBY). The news helped to offset falls for the travel sector which has been hit by the atrocity in Nice, the attempted coup in Turkey and the failure of LowCostHolidays – one of the UK’s biggest online booking firms.

The stock price of Cambridge-based chip designer Arm flew higher in early trade as the Japanese telecoms giant, SoftBank, sought to boost its exposure in the Internet of Things sector. SoftBank is set to pay £17 for each share in ARM which represents a 43% premium to last week’s closing price. Arm ended the day up 40.9% at 1,675 pence.

Commodities Update

Crude oil was sharply lower yesterday giving back all and more of Friday night’s gains on news of the attempted coup in Turkey. As news of the coup broke, investors rushed to sell equities while buying oil and other commodities which typically perform well in times of uncertainty. However, the coup unravelled rapidly and Turkish President Tayyip Erdogan not only quickly re-established control of the country but also neutered opposition by arresting thousands. Istanbul's Bosphorus Strait was closed for a number of hours on Friday but was quickly reopened. Around 3% of global oil shipments pass through the Strait, mainly from Black Sea ports and the Caspian region, so there was widespread relief that this major chokepoint wasn’t seriously compromised.

Following the failed coup, investors refocused on the current fundamental and technical drivers of the oil price. Fundamentally, investors will once again pay close attention to this week’s US inventory data. Last week both the American Petroleum Institute (API) and Energy Information Administration (EIA) reported increases in stockpiles across certain oil products. In addition, the US oil rig count posted its sixth rise in seven weeks. Zero Hedge reports that the count is now up 10% from its lows which is the biggest percentage increase since December 2011. Chart-wise, crude continues to pull back from the multi-month highs hit in early June. However, support for Brent and WTI appears to be building around $46 and $45 respectively.

Gold and silver fell sharply yet again yesterday. At one stage silver was down over 2% as it broke below $20 triggering an avalanche of sell stops. Investors recovered their risk appetite following Friday’s failed coup attempt in Turkey. This led to a move out of safe haven trades such as the yen and precious metals, and a move back into equities and other risk assets.

 Gold and silver were trading at multi-year lows in mid-December 2015 with many analysts predicting further losses to come. However, both put in chart double bottoms and these, together with a pull-back in the US dollar, set the stage for a dramatic turnaround. Suddenly the four and a half year bear market was over. This had seen gold fall by 45% from its high of $1,920 in August 2011 and silver plunge 72% from just under $50 in April the same year to their respective lows of $1,046 and $13.64 in December 2015.

It helped that 2016 kicked off with a rout in equities and other risk assets as the Chinese stock market slumped for a second time within six months. There was a further devaluation in the yuan which spooked markets and had investors rushing to safe havens. Even as stock markets recovered, gold and silver continued to rally.

The rally in both metals appeared to stall in early May as both pulled back sharply from multi-year highs. However, last month’s referendum when the UK voted to leave the European Union saw both metals fly higher. May’s sell-off now looks like nothing more than a healthy correction which allowed both metals to consolidate and create the foundations for another surge higher.

Fundamentally, gold and silver should continue to make gains in the current zero-to-negative rate environment. Neither precious metal pays a yield or dividend unlike a bond or equity. However, this becomes less of an issue when over $10 trillion of sovereign bonds have negative yields and when investors are paying record prices for equities (US) in a low-growth deflationary world. On top of this we have the US Federal Reserve unwilling (or unable) to tighten monetary policy further with the Bank of Japan apparently considering adopting “Helicopter Money”.  If this situation persists, then precious metals should continue to find support going forward.

Forex Update

The euro continues to consolidate at lower levels post-Brexit. The EURUSD is managing to hold above 1.1000 and this looks to be building as an area of support for the single currency. However, the upside could well be capped – over the short-term at least – with resistance coming in around the 1.1260/1.1300 area.

This Thursday the European Central Bank (ECB) holds a rate-setting meeting. The ECB is expected to hold its Minimum Bid Rate unchanged at 0%. It shaved its headline rate by 5 basis points in March this year and the consensus view is that the central bank will not be rushing to follow Japan, Sweden and Switzerland and adopt a negative headline interest rate. Bear in mind the ECB has already cut its Deposit Rate a number of times and this now stands at -0.4%. This means that financial institutions are now charged interest by the ECB if they wish to deposit surplus funds with the central bank. By the same token the expectation is that the ECB will also hold off from further monetary stimulus for now – despite the additional uncertainties unleashed by the UK’s decision to leave the European Union. The governing council is expected to follow the Bank of England’s MPC decision to hold back from further stimulus but keep an easing bias going into their next meetings.

Investors will be paying close attention to ECB President Mario Draghi’s subsequent press conference. He is expected to address concerns over continued tepid Euro zone economic growth and persistent deflation fears. But as far as the ECB’s bond purchase programme is concerned, there are worries that the central bank is running out of qualifying bonds to buy. So it could be that the ECB widens the scope of its bond purchase programme to include riskier assets. If so, then this could put a lid on gains for the euro for the rest of the summer.

On Friday night the Japanese yen rose sharply as news came through of the coup attempt in Turkey. Investors rushed to bail out of equities and other risk assets and this saw them buy back the yen that they had previously borrowed to finance these trades. However, yesterday saw the yen give back these gains and continue a decline which began the previous week. The yen has fallen sharply since Shinzo Abe’s governing Liberal Democratic Party won a resounding victory in upper house elections just over a week ago. The win has been viewed as validating Prime Minister Shinzo Abe’s approach to reinvigorating the country’s economy. Mr Abe has already announced that a package of government infrastructure spending is on its way. But last week saw mounting speculation that Japan is getting set to adopt “Helicopter Money” in an unprecedented attempt to finally lift the country out of its 25-year deflationary slump.

Upcoming events

Today’s significant economic data releases include UK inflation data, and German and Euro zone ZEW Economic Sentiment surveys. From the US we have Building Permits and Housing Starts. Later on Bank of England MPC member Ben Broadbent is set to testify on blockchain technology before the Economic Affairs Committee.


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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