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11 Aug 2016
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11 Aug 2016
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10 Aug 2016
AM Bulletin: US Crude Oil inventories eyed
10 Aug 2016
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09 Aug 2016
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 Wednesday 10 August 2016

AM Bulletin: US Crude Oil inventories eyed

 

 

Indices Update

It was a mixed start for European indices this morning and initial trade was directionless. The US dollar is weaker and this has helped to give gold and silver a lift. Crude oil turned lower overnight following the latest inventory update from the American Petroleum Institute. This showed an unexpected build in stockpiles.

It was a relatively quiet start to yesterday’s European trading session with a modest upside bias. The pace of buying picked up as the US open approached and this took the NASDAQ and S&P500 to fresh record intra-day highs. However, prices pulled back from their best levels later in the day leaving the major US indices little-changed.

On Monday it felt as if there was a fading of the upside move which followed Friday’s positive surprise on US Payrolls. Traders were preparing themselves for the possibility of a few quiet days as there’s little out data-wise until Friday’s US Retail Sales and PPI numbers. However, the US crude oil inventory update from the Energy Information Administration has the potential to shake things up. Oil has bounced back from its recent sub-$40 move and today’s report could decide whether the rally continues or we get a resumption of the sell-off which began in early June. This is important as equity investors keep a close eye on crude. In the current environment a higher oil price supports stocks while lower crude prices increase fears of corporate bond defaults which leads to investors cutting their exposure to equities.

Yesterday saw the latest update on Chinese inflation. July’s CPI slipped back again as there was less upside pricing pressure from food prices. The year-on-year number came in at +1.8%, well below the 3% target set by the People’s Bank of China (PBOC) and marking the third consecutive month that this key inflation measure came in lower. The news led to speculation that the PBOC may be preparing to ease monetary policy further.

UK 10-year gilt yields slipped below 0.6% for the first time on record, while the pound dropped against the dollar. This was despite yesterday’s unexpected rise in the British Retail Consortium’s Retail Sales Monitor. Investor behaviour is being influenced more by the Bank of England’s additional stimulus measures with last week’s £60 billion addition to its Asset Purchase Facility and its 25 basis point rate cut with the possibility of more to come.

The FTSE 100 index closed up 42.2 points, or 0.6%, to end the day at 6,851.3

The German DAX rose 260.5 points or 2.5% to end the day at 10,692.9

The US30 closed up 3.7 points to finish at 18,533. The S&P 500 rose 0.04% to close at 2,181.7 while the Nasdaq 100 finished 0.2% higher at 4,795.8

Equities

Shares in Legal & General (LGEN) fell sharply in early trade yesterday. At one point the stock was down 6%, making it the FTSE100’s worst performer. The sell-off came despite the insurance group reporting a 23% increase in profits before tax for the first six months of the year. The company’s pensions unit was the standout performer. However, its investment arm reported a slowdown in new client funds while there was a sharp drop in profits in its general insurance division. L&G blamed market volatility ahead of the UK’s referendum on EU membership for the decline. The stock ended 5.6% lower at 206 pence.

Commodities Update

Crude oil pushed higher again yesterday continuing a corrective bounce which began last Wednesday. However, it pulled back from its best levels after the American Petroleum Institute reported a surprise build in inventories.

On Monday an inventory update from Genscape showed a larger-than-expected build of crude at the Cushing, Oklahoma hub. However, this was widely ignored as investors focused instead on news that OPEC members Venezuela, Ecuador and Kuwait were agitating for an agreement amongst the world’s major oil producers to freeze output. Such a move seems most unlikely as other OPEC members such as Saudi Arabia, Iran and Iraq are hell-bent on drilling and selling as much oil out as they can pump out of the ground. Russia, non-OPEC member and now the world's top oil producer, was also quick to knock back the idea.

Later today the Energy Information Administration will release its update on US stockpiles for the week ending 5th August.

Yesterday gold and silver had a similar trading session to Monday’s one. Both began lower but picked up and headed back into positive territory once the US opened for business. The two precious metals held a close negative correlation to the US dollar. The greenback gave back earlier gains midway through the European session giving traders an excuse to buy gold and silver. Last Friday’s blow-out Non-Farm Payroll data led to a sharp rally in the dollar and a slump in gold and silver. Investors calculated that the better-than-expected data increased the likelihood of a rate hike from the Federal Reserve at its September meeting. The prospect of higher US interest rates increases the attractiveness of holding US dollars and raises the lost-opportunity costs of holding precious metals so making them less attractive to investors.

Forex Update

Sterling was sharply lower in early trade yesterday although it made back some of its losses as the trading session progressed. Cable broke back down below 1.3000 to trade at its lowest levels in a month. The trigger for this move was the release of a clutch of UK data - Manufacturing Production, Industrial Production and specifically the Goods Trade Balance.

The trade deficit rose to £5.1 billion in June, around double the consensus expectation. Imports came in at £48.9 billion, which was a record for a single month.  Exports rose by £1 billion over the same period. Also, Manufacturing Production slumped by -0.3pc last month, following on from a downwards revised -0.6pc for May. However, Industrial Production rose 0.1% in June which helped the second quarter register the best quarter of growth since 1999. But June’s modest rise showed that the UK economic recovery had little momentum in the run-up to the referendum with most of the gains coming in April.

Last Thursday sterling fell substantially after the Bank of England (BoE) cut its headline interest rate by 25 basis points and raised its Asset Purchase Facility by £60 billion to £435 billion. It announced its intention to purchase up to £10 billion in corporate bonds and set up a new Term Funding Scheme worth up to £100 billion to protect bank margins.  BoE Governor Mark Carney also said the Bank was prepared to cut rates further towards the zero-bound if required.

Chart-wise, there’s little in the way of support for cable between current levels and the post-Brexit low around 1.2800. Below here we’re trading at levels not seen since the mid-1980s. Resistance comes in around 1.3330 or so. This marks the 0.24 Fibonacci Retracement of the sell-off from the high seen ahead of the referendum and the low hit in the first week of July.

The US dollar weakened against all the majors yesterday. This saw the USDJPY drop back below 102.00. Investors continue to express their disappointment over the Bank of Japan’s monetary stimulus package which was far lighter than expected as did the Japanese government’s accompanying fiscal stimulus programme.

Upcoming events

Today’s significant data releases include US JOLTS Job Openings, Mortgage Delinquencies, the Federal Budget Balance, and Crude Oil Inventories. We also have a rate decision from the Reserve Bank of New Zealand where a 25 basis point cut is expected, taking the Official Cash Rate to 2.0% 

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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