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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
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27 Jul 2016
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27 Jul 2016
PM Bulletin: FOMC look-ahead (and Japanese stimulus talk)
26 Jul 2016
AM Bulletin: FOMC meeting begins today
26 Jul 2016
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25 Jul 2016
PM Bulletin: EURUSD breaks below 1.1000
25 Jul 2016
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25 Jul 2016
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22 Jul 2016
AM Bulletin: Stocks lower as oil weighs
22 Jul 2016
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21 Jul 2016
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21 Jul 2016
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20 Jul 2016
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20 Jul 2016
PM Bulletin: A look at the yen
19 Jul 2016
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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
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13 Jul 2016
PM Bulletin: Global indices pushing higher
12 Jul 2016
AM Bulletin: Equity rally powers on
12 Jul 2016
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11 Jul 2016
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11 Jul 2016
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08 Jul 2016
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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 was a softer tone to the major indices this morning as investors responded to the news of the horrific attack in Nice overnight. The mood is somewhat muted and trading is quiet especially when compared with the frenetic market behaviour earlier in the week.

European and US stock indices flew higher yesterday. All the majors soared in early trade and the momentum saw most close out with significant gains. The one notable exception was the FTSE100 which fell sharply following the Bank of England’s surprise decision to keep its headline Bank Rate unchanged at 0.5%. The consensus expectation had been for a 25 basis point cut. However, members of the MPC felt it prudent to hold back from making any change until their next meeting in early August.

But the MPC’s summary made it clear that most members expect monetary policy to be loosened at next month’s meeting. That’s only three weeks away, but even that should help them better assess the ongoing impact of the Brexit vote. The MPC also stated that despite a fall in sterling, markets have functioned well in the referendum’s aftermath. However, the committee saw evidence that businesses are delaying investment projects and postponing recruitment decisions. In addition, activity in housing has slowed. Overall, the MPC feels the UK may experience lower growth and higher inflation as a result of its exit from the EU. It’s worth bearing in mind that further monetary easing is likely to send sterling lower and push inflation up even more. This certainly doesn’t look like a problem at the moment, but the Bank will be wary of unleashing an inflation genie which can only be brought back under control with sharply higher rates.

The FTSE 100 index closed at 6,654.5 down 15.9 points on the day, or 0.2%

The German DAX rose 137.6 points or 1.4% to end the day at 10,068.3

The US30 closed up 134.3 points to finish at 18,506.4. The S&P 500 rose 0.5% to close at 2,163.8 while the Nasdaq 100 rose 0.7% to close at 4,596.5

Equities

Yesterday’s big earnings report came from JP Morgan (JPM). The US banking giant posted a strong set of second quarter results ahead of the open, and these helped to support the pre-market Wall Street rally. Earnings per share came in at $1.55 which was way above the $1.43 consensus estimate. Revenues came in at $25.2 billion on expectations of $24.16 billion. On the subject of Brexit, JP Morgan said it was too early to say how it would affect the bank’s future plans. After an initial bounce the stock fell back from its best levels and ended the day up 1.5% at $64.11

Investors are keeping a close eye on US bank earnings for last quarter particularly to see if the UK referendum had any effect on revenues. But they will also be looking for evidence that the banking sector has turned a corner after a particularly difficult first quarter. The first few months of the year were notable for stock market turbulence and a falling oil price. Later today we have second quarter earnings from Wells Fargo (WFC), Citigroup (C) and US Bancorp (USB).

Commodities Update

Crude oil slipped in early trade yesterday but managed to push back into positive territory later in the session. The rally was linked to a pull-back in the US dollar which followed the Bank of England’s surprise decision to keep its headline interest rate unchanged at 0.5%. The market had expected the Bank to cut by 25 basis points, so the 8-to-1 MPC vote to stand pat led to a sharp rally in the British pound.

Despite this, a number of analysts believe that crude has further to fall in the short-term, citing the latest updates on US inventories. On Tuesday the American Petroleum Institute (API) reported that supplies rose by 2.2 million barrels for the week ended 8th July. This was on expectations of a 3 million barrel drawdown and was the biggest build in 10 weeks. The following day the Energy Information Administration (EIA) reported the largest build in distillates in 6 months while production showed its biggest increase since October 2015. On top of this the International Energy Agency (IEA) said that OPEC’s oil production climbed to an eight year high in June with total output up 400,000 bpd to more than 33 million bpd. The agency also said that while supply and demand were mostly in balance in the second quarter, there was a persistent glut in stockpiles which could cap prices. The IEA went on to say that there were some signs that demand growth was slowing a touch which should also help to keep a lid on the oil price.

Gold fell sharply in early trade yesterday as there was a strong upsurge in investor risk appetite. The carry-trade currency of choice (the Japanese yen) also fell sharply as investors sold (borrowed) it to finance riskier trades. This saw gold lose its appeal as a safe haven and it stumbled lower before finding some support around the $1,320 level. Meanwhile silver briefly dipped below $20 although it bounced back sharply from here.

There’s little doubt that this week’s surge in equities (which has seen the S&P and Dow Jones Industrials make a succession of record highs) has led to investors losing interest in the two precious metals and trim back their exposure accordingly.

There has been widespread relief that the UK has a new Prime Minister and a large degree of political stability has been established. However, much now depends on how confident investors are that the worst is over in terms of general political uncertainty and the outlook for the global economy. Soon the US will vote for a new president and neither candidate has broad appeal. As far as the economic outlook is concerned, most central banks are worried enough to keep monetary policy extraordinarily loose. Ultimately this should support both gold and silver. It could be that the recent sell-off has simply blown the froth off an overbought market. If so then we could be witnessing a consolidation which will prepare the two precious metals for another push higher.

Forex Update

As yesterday’s Asian Pacific FX session came to an uneventful close, the Japanese yen suddenly fell sharply. It was difficult to highlight a catalyst for the move but it had a dramatic knock-on effect in that equities began to rally and precious metals slumped. I can’t help thinking that the yen’s sell-off was linked directly to investors switching aggressively into “risk-on” mode. We’ve seen the Dow and S&P make a succession of record highs this week as the political situation in the UK suddenly stabilised after the post-Brexit tumult. On top of this Japan’s ruling Liberal Democratic Party cleaned up in last weekend’s upper house elections. This was seen as a complete validation of Prime Minister Shinzo Abe’s three pronged approach to reinvigorating the country’s moribund economy. In other words, the markets now expect a fresh raft of fiscal and monetary stimulus together with another attempt at those all-important structural reforms. Certainly, Mr Abe was quick to announce that a package of government infrastructure spending was on its way. Now investors have to wait for the next Bank of Japan (BOJ) meeting at the end of the month to see if looser monetary policy if also forthcoming. By some measures it’s certainly overdue. The BOJ last intervened in January this year when their adoption of negative interest rates backfired spectacularly as the yen soared on the announcement.

At yesterday’s Bank of England meeting the MPC overwhelmingly voted to keep rates unchanged at 0.5%. The decision surprised investors who had anticipated a 25 basis point cut. Sterling soared on the news but pulled back from its best levels later in the session. In its summary the MPC said that most Committee members felt that monetary policy would be loosened at next month’s meeting. This would give the MPC another few weeks in which to assess the economic impact of the UK’s decision to leave the European Union.

Otherwise, the US dollar, as measured by the Dollar Index, was little-moved yesterday. The greenback fell against the euro, British pound and Canadian dollar (the latter thanks to a pick-up in oil prices) but rose against the Japanese yen and Swiss franc.

Upcoming events

Today’s significant economic events include a speech from BoE Governor Mark Carney in Toronto on climate change and the financial markets, Euro zone CPI, Euro zone Trade Balance, Canadian Manufacturing Sales and UK CB Leading Index. From the US we have CPI, Retail Sales, Empire State Manufacturing Index, Capacity Utilisation, Industrial Production, Consumer Sentiment, Inflation Expectations and Business Inventories. 

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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