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29 Apr 2016
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29 Apr 2016
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28 Apr 2016
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26 Apr 2016
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22 Apr 2016
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21 Apr 2016
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20 Apr 2016
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18 Apr 2016
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15 Apr 2016
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11 Apr 2016
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08 Apr 2016
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08 Apr 2016
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07 Apr 2016
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07 Apr 2016
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06 Apr 2016
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06 Apr 2016
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05 Apr 2016
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05 Apr 2016
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04 Apr 2016
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04 Apr 2016
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 Thursday 07 April 2016

AM Bulletin: Oil surge boosts equities

 

 

Indices Update

There’s a mixed tone to European indices and US stock index futures this morning. This follows strong gains yesterday on the back of a surge in crude oil and soaring biotech stocks.

Last night the FOMC issued the minutes from its meeting back in March. This was when the Fed left rates unchanged and lowered its forecast for hikes for the rest of this year to 50 basis points from 100. There was a muted market reaction to the release which indicated a split between those favouring another hike in April and others urging caution. One noticeable factor was just how many times the FOMC referred to global (read China) risks. One reading of this is that the next US rate hike (when/if it comes) will have little to do with where the unemployment and inflation data is. In other words, expect lower rates for longer.

European and US stock indices rose yesterday morning. Equities got a lift as crude oil recovered with WTI and Brent pushing back above the significant support/resistance levels of $36 and $38 respectively. The Japanese yen has continued to soar with the USDJPY crashing below the 110.00 level. So far this has had a limited effect on equity markets, principally because yesterday’s soaring oil price dominated. Meanwhile China’s Caixin Services PMI came in at 52.2 which was better than the expected reading of 51.4 and indicated further expansion in the sector.

Investors remain concerned about the recent strengthening of the yen which has taken it to its highest level against the US dollar since October 2014. A stronger yen is very bad news for the Japanese economy which is struggling with tepid growth and low inflation. It is particularly worrying as Japan’s policymakers and the Bank of Japan have taken unprecedented fiscal and monetary measures to weaken the currency. The feeling is that they may have run out of ammunition when it comes to taking effective action to stimulate their economy.  

The FTSE 100 index closed at 6,161.6 up 70.4 points on the day, or 1.2%

The German DAX rose 61.2 points or 0.6% to finish at 9,624.5

The US30 closed up 112.7 points to finish at 17,716.1 The S&P 500 rose 1.1% to close at 2,066.7 while the Nasdaq 100 gained 1.6% to close at 4,543.8

Equities Update

Yesterday Hennes & Mauritz (HM) the world’s number two clothes retailer (behind Inditex, owner of Zara) announced first-quarter earnings for 2016. The company reported a 9% increase in sales when calculated in local currencies. It also reported a gross profit of 22.7 billion Swedish krona ($2.79 billion). The Fashion retailer said the negative impact of the strong dollar had started to wane. The stock closed over 5% higher at 279.60 Swedish krona. 

Commodities Update

Oil rallied sharply yesterday. In early trade WTI and Brent had both snapped higher and broke back above significant resistance/support around $36 and $38 respectively. There were further gains following the latest release of US inventories for the week ending 1st April. These showed a drop of 4.9 million barrels on expectations of a 3.1 million build. Crude oil flew higher in the immediate aftermath of this surprise slump. Not only that but both contracts built on these gains as the session progressed suggesting that fresh buying was coming in on top of some panic short-covering.

The initial rally in crude began late on Tuesday and bucked the downward trend that’s been in place since mid-March. The sell-off over the last few weeks looked like a reaction to the dysfunction which has become apparent within OPEC ahead of the meeting between OPEC and non-OPEC producers planned for 17th April in Qatar. An agreement currently looks highly unlikely as tensions build between Saudi Arabia and Iran. The Saudis had initially suggested that Iran would be exempted from any production freeze as the latter worked to raise production following the recent withdrawal of sanctions. However, last week Saudi Deputy Crown Prince Mohammed bin Salman said the kingdom Saudi Arabia would only freeze output if Iran and other major producers do so too. Then Iranian Oil Minister Bijan Zanganeh said Iran would continue to increase production and exports until it reaches the market position it enjoyed before the imposition of sanctions. Unfortunately relations between the two countries took a turn for the worse on Monday. The FT reported that Saudi Arabia was banning vessels that transport Iranian crude from entering their waters.

Yesterday gold and silver gave back most of their gains from earlier in the week. This was despite little movement in the US dollar and it felt as if traders were hanging back ahead of the release of the minutes of last month’s FOMC meeting.

Gold is struggling to recapture the upside momentum it enjoyed over the first three months of the year. At the beginning of March it finally cracked above resistance around $1,240 and quickly traded above $1,280 to hit its highest level in over 12 months. But now it seems stuck with $1,240 acting as resistance once again. The US dollar remains one of the key drivers of gold. When the dollar goes up gold (when priced in dollars) becomes more expensive, so demand goes down and the price follows. Currently the dollar (when viewed through the EURUSD) is in a gentle uptrend which should help support the gold price. But a look at the chart suggests there’s some resistance coming in around 1.1420 or so – the 0.76 Fibonacci Retracement of the Aug-Dec sell-off. So gold could continue to struggle to push higher if the euro retreats and the dollar strengthens. 

Forex Update

The US dollar retreated ahead of the release of minutes from the Fed’s FOMC March meeting. The greenback registered losses against most of the majors, but once again it was the Japanese yen that was in focus. In mid-afternoon the USDJPY broke below the technically and psychologically important 110.00 level. It initially bounced back strongly and there were some suggestions that a concerted effort was underway to drive the yen lower. However, these efforts were soon exhausted and the pair went on to crack below 110.00 once again.

The yen has continued to strengthen overnight. Partly this has to do with a weaker dollar following the release of the FOMC’s minutes last night. These showed that committee members were divided concerning hiking rates again this month. However, the biggest takeaway was the continued mention of global risks. This emphasis has convinced many investors that the Fed will always have an excuse not to raise rates – no matter how much further the unemployment rate falls or even if their 2% inflation target is breached.

But the seemingly relentless yen strength has a momentum of its own. The currency is sharply higher again this morning. No doubt there is some disappointment that in a speech overnight BOJ Governor Haruhiko Kuroda said nothing new about Japan’s economic outlook or monetary policy.  

Upcoming events

Today’s significant economic events include the release of the ECB Monetary Policy Meeting accounts, Canadian Building Permits and US Weekly Jobless Claims. We are also expecting speeches from ECB President Mario Draghi and US Federal Reserve Chairman Janet Yellen. 

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

Category: AM Bulletin


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