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 Thursday 09 June 2016

AM Bulletin: Precious metals soar

 

 

Precious metals soar

Indices Update

It has been a mixed start for European equities and US stock index futures so far this morning. Most of the major indices are drifting lower despite a firmer close on Wall Street last night. Crude oil is still bedding in above $50 but the weaker dollar is pushing the yen up and making investors nervous.

US and European stock indices spent yesterday realigning themselves after getting out of whack on Tuesday. This led to some sharp losses for the Continental majors (the DAX, CAC and MIB) while the US indices and the FTSE100 made modest gains.

Earlier in the day the S&P500 traded less than 1% below its all-time high set in May last year. The Dow Jones Industrial Average came within 2% of its own record from 2015. This was despite data from China overnight which showed a drop in May exports of 4.1% from the same time last year. This was worse than expected although imports, despite slipping by 0.4% were better than expected. On top of this the World Bank cut its outlook for global growth in 2016 to 2.4% from the 2.9% rate it was predicting in January.

US equities are seen as being in a “sweet spot.” This is because Janet Yellen has effectively ruled out a summer rate hike from the Federal Reserve while insisting that the outlook for the US economy is pretty rosy. This is despite Friday’s appalling Non-Farm Payroll miss which, if you consider downward revisions to prior months’ data, wasn’t a complete outlier. In addition the Labour Market Conditions Index (Mrs Yellen’s preferred employment barometer) has just recorded its fifth consecutive decline and its biggest month-on-month fall since 2009.

Yesterday the European Central Bank (ECB) officially launched its corporate sector purchase program (CSPP), a move announced by President Mario Draghi in March. The programme is another attempt by the central bank to raise inflation in the Euro zone and boost growth.

The FTSE 100 index closed at 6,301.5 up 17 points on the day, or 0.3%

The German DAX fell 70.7 points or 0.7% to end the day at 10,217

The US30 closed up 66.8 points to finish at 18,005. The S&P 500 rose 0.3% to close at 2,119.1 while the Nasdaq 100 rose 0.2% to close at 4,520.6

Equities

Sainsbury's (SBRY) reported first-quarter like-for-like retail sales down 0.8%. The supermarket has cut back on promotions and described conditions in the grocery market as “challenging” with food price deflation impacting sales and continuing to affect food prices. Yet clothing and general merchandising both rose by 5% for the quarter while online sales were up by 8%. The supermarket giant remains the UK’s second biggest in terms of grocery market share with 16.8% of the market. It is some way behind market leader Tesco (28.4%) but was a touch ahead of Asda as at the end of February. Overall investors were happy with the results as the decline in sales was less than expected. The shares ended 1.7% higher at 250.6 pence.

Commodities Update

Yesterday WTI continued to consolidate above $50 per barrel along with Brent. As on Tuesday the US dollar was weaker across the board and this helped to support prices. The EURUSD built on the gains made since Friday’s poor US payroll number and briefly topped 1.1400. Meanwhile the Japanese yen rallied further with the USDJPY dropping back below 107.00.

Traders were also excited after data from China showed that oil imports had hit their highest levels in over six years. What is less clear is whether this is due to a pick-up in Chinese economic activity, or stockpiling. A number of oil producers (such as Venezuela) contracted to pay off interest and debt on Chinese loans with oil shipments. These deliveries are still being made irrespective of real Chinese demand.

Crude pulled back from its best levels following the latest update on US inventories from the Energy Information Administration (EIA). These showed a decline of 3.2 million barrels of crude for the week ending 3rd June. This was a larger draw than the prior week but in line with the consensus expectation. However, the EIA also recorded bigger-than-expected builds in both distillate and gasoline products, so backing up the API data from Tuesday. Meanwhile, US crude production rose by 100,000 barrels per day (bpd) last week to 8,745,000. This was the first increase in US output for nearly three months and supported Monday’s update from energy services company Baker Hughes. This report showed a pick-up in the US rig count for only the second time this year.

Gold and silver flew higher yesterday with heavy buying in the Asian Pacific session. It is often the case that gains made in precious metals in the overnight session are quickly reversed once the US opens. However, that wasn’t the case yesterday. In fact, both metals shot higher again on the New York open.

Precious metals have soared higher since Friday’s payroll release. The number was so bad that it effectively closed down all chances of a rate hike from the Fed when it meets next week. There is still a slight chance of a rate increase in July, but we’d have to see a drastic improvement in US jobs, manufacturing and the inflation outlook over the next six weeks for that to be considered seriously. Consequently, the US dollar is back under pressure and that is positive for dollar-denominated commodities. Additionally, demand for precious metals is likely to pick up in a low-rate environment. While owning gold and silver won’t pay you any interest (unless you’re a large financial institution with leasing agreements and storage facilities), there’s little in the way of lost opportunity costs when over $10 trillion of government debt has a negative yield.

It’s also likely that investors are picking up precious metals as a “safe-haven” play ahead of the UK referendum. After all, it’s probably safer to buy gold and silver with the two near multi-year lows rather than parking your money in equities which are trading near record highs.

Forex Update

The US dollar resumed its slide against the euro yesterday. This led to the EURUSD pushing back above 1.1400 at one stage while the Dollar Index fell further below old support at 94.00. Last Friday’s dismal US Non-Farm Payroll number has reignited the “weak dollar” trend that had been in place since the end of last year. After rising steadily from December to early May and briefly topping 1.1600, the EURUSD suddenly fell sharply losing 4% in less than a month. This followed a concerted effort from members of the Federal Reserve to convince investors that a summer rate hike was still being considered. However, that seems most unlikely now, thanks to Friday’s payrolls, hence the bounce in the euro. But things become a bit trickier now. While next week’s FOMC meeting isn’t expected to bring a rate hike the euro may falter ahead of the UK’s referendum on 23rd June. The EURUSD is closing in on resistance around 1.1450. But it may struggle to test this level seriously until the vote is out of the way.

Upcoming events

Today’s significant data releases and events include French Non-Farm Payrolls, Swiss Unemployment, the German Trade Balance, Italian Unemployment, a speech from ECB President Mario Draghi and the UK Trade Balance. From the US we have Weekly Jobless Claims and Wholesale Inventories.

 

Posted by David Morrison

Category: AM Bulletin


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