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31 May 2016
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31 May 2016
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27 May 2016
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27 May 2016
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26 May 2016
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26 May 2016
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26 May 2016
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25 May 2016
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25 May 2016
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24 May 2016
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24 May 2016
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23 May 2016
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23 May 2016
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20 May 2016
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20 May 2016
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19 May 2016
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19 May 2016
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18 May 2016
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18 May 2016
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17 May 2016
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17 May 2016
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13 May 2016
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13 May 2016
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13 May 2016
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13 May 2016
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12 May 2016
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12 May 2016
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11 May 2016
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11 May 2016
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10 May 2016
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10 May 2016
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09 May 2016
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09 May 2016
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06 May 2016
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06 May 2016
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06 May 2016
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05 May 2016
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05 May 2016
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04 May 2016
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04 May 2016
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03 May 2016
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03 May 2016
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Indices Update
 

European equities and US stock index futures have bounced this morning following yesterday’s rate-panic sell-off. It appears that investors have calmed down somewhat after feverishly pricing in the prospect of a slew of Fed rate hikes for 2016. This makes sense given that we are in the US Presidential Election year, there’s an upcoming referendum on the UK leaving the EU and both the US and global economic outlooks could best be described as cloudy. It’s possible that we get a US rate increase this summer, but talk of three hikes this year seems far-fetched.

Global stock indices were sharply lower in early trade yesterday as investors digested the minutes of the Fed’s April FOMC meeting. These were released on Wednesday evening and were more hawkish than expected. The minutes suggested that the FOMC was relatively upbeat about the outlook for the US economy and that a June rate hike was likely if the data improves.

Analysts have rushed to cut the odds on a rate hike at next month’s Fed meeting after having discounted the likelihood of a June rise for most of this year. Not only that, but markets are also beginning to price in a rate hike in July as well. This comes after hawkish comments from San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart earlier in the week followed by those of Federal Reserve Bank of Richmond President Jeffrey Lacker who said he was comfortable with the idea of four hikes for the rest of this year. None of these regional presidents are FOMC-voting members this year.

Later on New York Fed President William Dudley (a FOMC-voting member) said a summer rate hike was likely if the economy met expectations. In addition, he said that the market’s pricing of the probability of future monetary tightening had been far too low prior to the release of the April minutes.

The FTSE 100 index closed at 6,053.4 down 112.5 points on the day, or +1.8%

The German DAX fell 147.3 points or 1.5% to end the day at 9,795.9

The US30 closed down 91.2 points to finish at 17,435.4. The S&P 500 fell 0.4 to close at 2,040 while the Nasdaq 100 slipped 0.5% to close at 4,315.6

  
Equities
 

Walmart (WMT) reported yesterday bringing the earnings season to an unofficial close in much the same way that Alcoa unofficially marks the open. The retail giant is the second biggest employer in the US after the government. The company posted first-quarter earnings of $0.98 per share versus $1.03 a share for the same period last year. Revenue for the quarter came in at $115.9 billion, against the comparable year-earlier figure of $114.83 billion. While earnings were light they were better than the $0.88 consensus expectation. Revenues were also better than the $113.22 billion expected. The company also predicted earnings per share in the range of $0.95 - $1.08, which was better than estimates focusing around $0.98. Walmart shares ended the day 9.6% higher at $69.20

   
Commodities Update
 

Crude held near 7-month highs in the early part of yesterday’s trading session. It had dipped sharply the day before following the latest inventory update from the Energy Information Administration (EIA). This showed a build in stockpiles of 1.3 million barrels last week on expectations of a 3.1 million barrel decline. However, the sell-off was short-lived as the build in crude inventories was offset to some extent by larger than expected drawdowns in gasoline and distillates.

But oil subsequently fell back as the dollar rallied following the release of the FOMC minutes. As noted before, these were more hawkish than anticipated. At the same time, investors reacted to comments from a number of regional Federal Reserve presidents who came out in favour of a series of rate cuts for the rest of this year. This was rounded off by New York Fed President William Dudley (a FOMC-voting member) who said a summer rate hike was likely if the economy met expectations.

Concerns over the likely effects of tighter monetary policy from the Fed kept WTI and Brent below the psychologically important $50 per barrel level. On Wednesday both WTI and Brent had come within cents of breaking above here. The increased likelihood of a June rate hike lifted the dollar and pushed the issue of supply disruptions onto the back-burner. However, hopes were raised that the Canadian wildfires may soon be brought under control due to the forecast of wet weather. In addition, Exxon Mobil was said to be increasing output in Nigeria which initially took some of the sting out of concerns of hostilities in the country. However, later reports suggested that militants were blocking Nigeria’s main export terminal.

Gold and silver fell sharply again in early trade yesterday. Gold managed to make back some of its losses as the day progressed, but silver had a torrid time and was down over 3% at one stage. The sell-off was a direct result of a rally in the US dollar. The greenback has been heading higher since the beginning of this month. However, it spiked higher earlier this week following statements from a couple of Federal Reserve regional presidents which favoured a number of rate hikes this year. San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart both said that rates could be hiked two or three times this year. This would imply rate increases totalling 75 basis points, which could take the Fed Funds rate up to 1.25%.

The dollar flew higher on Wednesday immediately following the release of the minutes from the FOMC’s April meeting. These were viewed as more hawkish than expected. Finally, New York Fed President William Dudley (a FOMC-voting member) said a summer rate hike looked likely if the economy met expectations.

Chart-wise, yesterday gold broke support around $1,260 and went on to dip below the psychologically significant $1,250 level. Support may come in around the lower upward-sloping trend line near $1

   
Forex Update
 

The US dollar soared on Wednesday following the release of minutes from the Fed’s FOMC meeting in April. These were considered more hawkish in tone than the statement released at that time. Analysts slashed the odds on the likelihood of a rate hike at next month’s meeting after having discounted the likelihood of a June rise for most of this year. Additionally, markets are beginning to price in a rate hike in July as well. Of course, the minutes from the April meeting are already old news as new information has come in since then. However, this week we also had hawkish comments from San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart. Neither is a voting member of the FOMC this year but nevertheless both said that rates could be hiked two or three times in 2016.

Then yesterday afternoon President of the Federal Reserve Bank of Richmond Jeffrey Lacker also came out with some hawkish comments saying he was comfortable with the idea of four hikes in 2016. But like his colleagues Lockhart and Williams, Lacker doesn’t have a vote on the FOMC this year. Later on, New York Fed President William Dudley (a FOMC-voting member) said a summer rate hike looked likely if the economy met expectations. In addition, he said that the market’s pricing of the probability of future monetary tightening had been far too low prior to the release of the April minutes. The question now is whether the market is correctly priced now or has overshot to some extent. After all, there are still questions over the robustness of the US economy, not to mention China’s. On top of this we have to consider the uncertainty surrounding the outcome of the UK referendum, the difficulty of adjusting monetary policy ahead of the US Presidential Election and the danger of the Chinese yuan being pegged to the US dollar which is suddenly heading higher. Don’t be surprised if we soon see Fed members start to temper their rate hike expectations. 

Upcoming events
 

Today’s significant data releases include UK CBI Industrial Order Expectations, Canadian CPI and Retail Sales. From the US we have Existing Home Sales and a speech from Federal Reserve Governor and FOMC voting member Daniel Tarullo. G7 meetings also begin today. 

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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