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22 Sep 2016
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21 Sep 2016
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21 Sep 2016
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20 Sep 2016
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20 Sep 2016
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 Tuesday 20 September 2016

AM Bulletin: Stock indices swing on oil price

 

 

Indices Update

European stock indices ended higher yesterday thanks to an early surge in oil. The rally in crude helped to lift US markets as well. However, it sold off late in the European session and this led to a pull-back in the major US stock indices. The Dow and S&P ended yesterday effectively unchanged and this has led to a mixed open for the European majors.

Recent moves in US indices suggest that algorithmic trading is dominating markets. This is computer-driven whereby buy and sell orders across a wide number of equities, stock indices and ETFs are automatically triggered according to complex mathematical models which often focus on headline news and economic data releases. Aside from some US housing data there isn’t much on the calendar so it seems likely that today’s trading session will be relatively quiet with low volumes (moves in crude oil notwithstanding). Investors will be wary of being long of risk ahead of key meetings from the Bank of Japan (BOJ) and US Federal Reserve.

As far as the Fed is concerned, the market doesn’t expect any change in monetary policy after the two-day meeting concludes tomorrow. The consensus expectation is that the FOMC will hold off from a rate hike but will once again signal their willingness to tighten monetary policy – sometime in the future. But the situation is considerably more nuanced in Japan.

The BOJ will conclude its own two-day meeting overnight. There is speculation that the central bank will loosen monetary policy further. This could mean another cut in the Deposit Rate, or making changes to its asset purchase program. However, there are fears that the BOJ is running out of ammunition when it comes to monetary stimulus. So far all its efforts have failed to boost growth, spur inflation or weaken the yen. The danger is that it loosens monetary policy yet again, but that the yen strengthens.

The FTSE 100 ended the day 103.3 points higher at 6,813.6

The German DAX rose 97.7 points or 0.95% to end the day at 10,373.9

The US30 closed down 3.6 points to finish at 18,120.2 The S&P 500 ended unchanged at 2,139 while the Nasdaq 100 fell 0.5% to close at 4,796.1

Equities

FTSE 250-listed firm Mitie (MTO) warned its operating profits will be 'materially below' previous expectations. The outsourcing company, whose customers include the Home Office and Rolls Royce, blamed uncertainty in the run up to and then following the UK’s referendum over membership of the EU back in June. Earlier this year, Mitie said the build-up to the vote had led to some clients delaying or even cancelling projects until the outcome of the referendum was known. The company said lower growth, higher staff costs (due to the introduction of the national living wage in April), public budget cuts and 'significant economic pressures' were taking their toll. The group said it expects its first half revenues to be 'modestly lower' and operating profit to be 'very significantly lower' compared to a year earlier. Shares in Mitie ended the day 28.9% lower at 191.3 pence.

Commodities Update

Crude oil shot higher in early trade yesterday. The rally came after Venezuelan President Nicolas Maduro said on Sunday that OPEC and other major oil producers were close to reaching a deal which could help stabilise prices. There’s been speculation since early August that OPEC and non-OPEC members will get together at a side meeting of an industry conference in Algeria next week with the aim of agreeing to freeze oil production. Also over the weekend, OPEC Secretary-General Mohammed Barkindo said cartel members may call an extraordinary meeting to discuss oil prices if they manage to reach any consensus in Algeria. Previously the Secretary-General had said this month’s discussions were nothing more than consultations. However, he’s now suggesting something could take place ahead of OPEC's pre-planned policy meeting in November.

Adding to oil’s early gains was news of clashes in Libya on Sunday. These halted the loading of oil cargos from the port of Ras Lanuf as Libya’s National Oil Corporation prepared to restart exports from the ports blockaded for several years.

Gold and silver made decent gains yesterday thanks to the sell-off in the US dollar. Both metals were firmer in early trade on Tuesday as well as the greenback softened ahead of crucial meetings from the US Federal Reserve and Bank of Japan (BOJ). Gold and silver should continue to benefit from the current low interest rate environment. However, the recent sell-off across the bond market has rattled investors. Yields have risen sharply on speculation that the 30-plus year bull market in bonds could be coming to an end as central banks reach the limits when it comes to monetary stimulus. Gold and silver could both fall sharply should the US central bank decide to hike rates at the conclusion of the two-day meeting tomorrow. They could also sell off if the BOJ disappoints when it comes to cutting its Deposit Rate or adding to its programme of asset purchases. However, it seems likely that the Fed will hold off from raising rates although investors will be paying close attention to the FOMC’s latest Summary of Economic Projections. This includes a forecast from all 17 FOMC members over how they see the fed funds rate changing over time.

As far as the price of gold is concerned, key support comes in around $1,300.

Forex Update

Currency markets were relatively quiet yesterday and there has been little movement in early trade on Tuesday. Investors have no interest in taking on additional exposure ahead of key central bank meetings from the US Federal Reserve and Bank of Japan. As far as the Fed is concerned, the market expectation is that the FOMC will hold off from tightening monetary policy. A number of economic data releases over the past few weeks indicate that the US economy isn’t as robust as the Federal Reserve would like us to believe. Last week’s US Retail Sales data was pretty grim and this is expected to negatively affect estimates for third quarter GDP. The weak data reduces the likelihood of a Fed rate hike tomorrow evening. However, last Friday’s latest update on CPI inflation was higher than expected. The release led to a sharp dollar rally as the pick-up in inflation was viewed as increasing the likelihood of a Fed rate hike. But the dollar pulled back yesterday and has drifted lower this morning. This is further evidence that the consensus view is that the Fed will leave rates unchanged tomorrow, but will try (yet again) to persuade investors that there will be a rate hike before the year-end.

But the key currency pair to watch now is the USDJPY. The Bank of Japan will announce the outcome of its deliberations overnight. The danger is that it disappoints the market, either by holding back from additional monetary stimulus, or not delivering enough. There’s even the danger that it over-delivers in that it announces a dramatic increase in stimulus which looks like blind panic. The trouble for the BOJ is that it has been at this game for so long with so little positive effect that it’s difficult to see what it can do now to regain investor confidence.

Upcoming events

Today’s significant economic events include the Swiss Trade Balance and German PPI. From the US we have Building Permits and Housing Starts.

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

Tagged: AM Bulletin

Category: AM Bulletin


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