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27 May 2016
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26 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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19 May 2016
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12 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

The Reserve Bank of Australia cut its headline Cash Rate to 1.75% from 2.0% overnight. The move began to get priced in last week after Australian CPI surprised analysts by turning negative. Nevertheless, the rate cut has led to fresh selling in the Aussie dollar.

Major global indices all lost ground at the end of last week as investors trimmed back their exposure to equities. However, the US majors bounced off their worst levels late on Friday and the rally carried on through yesterday’s trade. This was despite a number of disappointing data releases including China’s Manufacturing and Non-Manufacturing PMIs and the US ISM Manufacturing PMI. Traders jumped back in to take advantage of last week’s sell-off.

Investors were on the defensive at the end of last week. The big news was the Bank of Japan’s (BOJ) decision to hold back from announcing further monetary stimulus. The BOJ’s decision took many investors by surprise as recent earthquakes and a bout of yen strength had been considered the perfect cover for yet another round of intervention. The Japanese yen flew higher and the USDJPY broke below 107.00 to hit its lowest level since October 2014. Equities were in retreat while precious metals soared.

The BOJ decided to hold off from another round of stimulus just three months after adopting negative interest rates, on top of the unprecedented and open-ended QQE programme that has been running at its current level (equivalent to $60 billion of bond/ETF/REIT purchases per month) since October 2014. Bear in mind Japan has been engaged in quantitative easing since 2001 and more could be forthcoming this summer. BOJ Governor Haruhiko Kuroda insisted that he saw no limits to monetary stimulus. It would appear that the markets beg to differ.

Also last week the US Federal Reserve kept rates on hold as expected. The accompanying FOMC statement was viewed as a touch more hawkish than the one from March, and it appeared to keep the door open for a hike in June. It was of particular note that the FOMC removed its reference to global events posing risks to their outlook.

The market is now pricing in a 26% chance of the Fed hiking next month. This is up from 21% prior to last week’s meeting and FOMC statement. A number of commentators have pointed out that the Fed won’t want to make any change to rates at its September meeting. This is because it is so close to the Presidential Election in November. The Fed wouldn’t want to risk a sharp sell-off like the one in January. That being the case, the only other opportunity for a hike is December. So realistically the Fed can at best (or worst) hike rates twice this year, and each hike is unlikely to be anything other than 25 basis points.

On Friday the FTSE 100 index closed at 6,241.9 down 80.5 points on the day

Yesterday the German DAX rose 84.3 points or 0.8% to finish at 10,123.3

The US30 closed up 117.5 points to finish at 17,891.2 The S&P 500 ended 0.8% higher at 2,081.4 while the Nasdaq 100 ended up 0.9% at 4,381.3.

Equities Update

Ahead of the open HSBC reported a first quarter pre-tax profit before adjustments of $6.1 billion. This was well below the $7.1 billion recorded for the same period last year but well above consensus expectations of $4.3 billion. Earnings per share came in at $0.20 cents which was substantially lower than the $0.26 cents per share for the first quarter of 2015. HSBC which is Europe's largest bank by assets described market conditions as “challenging.” Nevertheless it held its first-quarter dividend in line at 10 cents per share. The stock was up around 2% in early trade. 

Commodities Update

Crude fell sharply yesterday. The sell-off was sparked by news that OPEC production approached an all-time high and on a bigger-than-expected stockpile build at the Cushing, Oklahoma hub for the week ending April 29th.

Oil continued to push on higher last week. Both Brent and WTI hit their best levels since early November last year. Technically the two contracts now have little in terms of resistance between current levels and their October 2015 highs. However, in order to get there Brent will have to crack back above $50 which corresponds to around $48 for WTI. This could prove to be a problem. After all, $50 is a big psychologically important level. It is also around here that there may be a significant number of US shale oil producers who will take their previously unprofitable rigs out of mothballs. Last week BP, ConocoPhillips, rig-owner Nabors Industries,  explorer Pioneer Natural Resources and US shale giant Whiting Petroleum all said that prices above $50 will encourage more drilling or provide a much-needed boost to cash flow. US producers have been responsible for a big drop in production recently. Consequently it may prove difficult for crude to rise much further should US production pics up once again.  At the same time, other producers will be anxious to cash in as well.

Gold and silver rallied sharply at the end of last week. The catalyst for the surge was the sell-off in the US dollar which followed the BOJ’s decision to hold off from further monetary stimulus. The Dollar Index slumped below support around the 94.00 area and this helped to boost the two precious metals. Yesterday gold managed to break above $1,300. However, some profit-takers came in and knocked the price back down again despite further dollar weakness.

The sell-off in silver was more pronounced. However, it has had a very impressive run up recently so some consolidation is probably in order. 

Forex Update

There were some important FX moves last week. The most significant was the rally in the Japanese yen. This followed the BOJ’s decision to hold off from further monetary stimulus. Many traders had expected the central bank to cut rates further into negative territory and/or increase its QQE programme, particularly given the country’s weak outlook for inflation, low growth and the damage done economically by the earthquakes from earlier in the month. However, the Japanese central bank did nothing although BOJ Governor Haruhiko Kuroda attempted some damage limitation by saying that he didn’t see a limit to monetary policy. On Friday the USDJPY broke below 107.00 to hit its lowest level since October 2014.

The next opportunity for the BOJ to provide further stimulus comes in three months’ time although there’s still a slim chance that the US Fed will hike in June and so take some of the heat out of the yen. Otherwise, there’s always the danger that the currency could make further gains, unless the BOJ decides to intervene. This may prove difficult as G20 countries have all agreed that they won’t intervene to weaken their currencies to gain a competitive advantage. Nevertheless, if the yen strengthens excessively (with the USDJPY breaking, say, 100) then the BOJ could argue that the move is “one-sided” and request permission of G20 members (specifically the US) to step in.

Thanks to the yen’s strength the US dollar has fallen sharply. Yesterday the EURUSD broke back above 1.1500 to hit its highest level since August last year. This was when we had a mini-meltdown thanks to the cack-handed response of China’s policymakers to the collapse in Chinese equities.

Meanwhile the Dollar Index broke below support around 94.00 last week. Yesterday it lost more ground trading down to levels last seen in January 2015. 


Upcoming events

There is a bank holiday in Japan

Today’s significant economic events include the UK’s Manufacturing PMI, US IBD/TIPP Economic Optimism and Total Vehicle Sales. Later on we have unemployment data from New Zealand. 

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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