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Video Update: Yellen’s speech sparks USD rally
31 Aug 2016
AM Bulletin: US dollar holds recent gains
31 Aug 2016
PM Bulletin: What next for the dollar?
30 Aug 2016
AM Bulletin: Investors revel in Fed’s “Goldilocks” worldview
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PM Bulletin: Yellen has spoken
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AM Bulletin: All eyes on Yellen
26 Aug 2016
PM Bulletin: BREXIT - THE NEXT CHAPTER The referendum and market reaction
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Holiday Schedule: Summer Bank Holiday
25 Aug 2016
AM Bulletin: Quiet start ahead of US Durable Goods/Jackson Hole
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Video Update: Look–ahead to Janet Yellen’s speech at Jackson Hole
24 Aug 2016
AM Bulletin: Investors edgy ahead of Yellen’s Jackson Hole speech
24 Aug 2016
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23 Aug 2016
Platform Tour: CFD Trading - How to Place a Trade
23 Aug 2016
AM Bulletin: Crude slide shrugged off by equities
23 Aug 2016
Trading Guides: How fast can you buy and sell with spread betting?
22 Aug 2016
Weekly Bulletin: Jackson Hole Symposium in focus
22 Aug 2016
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19 Aug 2016
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19 Aug 2016
Video Update: The next Fed rate hike, the dollar and oil
18 Aug 2016
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18 Aug 2016
Trading Guide: How to choose a spread bet provider
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17 Aug 2016
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16 Aug 2016
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16 Aug 2016
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15 Aug 2016
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15 Aug 2016
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15 Aug 2016
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12 Aug 2016
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12 Aug 2016
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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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09 Aug 2016
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08 Aug 2016
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08 Aug 2016
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08 Aug 2016
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08 Aug 2016
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08 Aug 2016
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05 Aug 2016
July: Non Farm Payrolls Out Today
05 Aug 2016
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05 Aug 2016
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04 Aug 2016
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04 Aug 2016
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03 Aug 2016
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03 Aug 2016
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02 Aug 2016
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02 Aug 2016
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01 Aug 2016
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01 Aug 2016
Monetary policy driving investor behaviour
01 Aug 2016
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 Wednesday 31 August 2016

AM Bulletin: US dollar holds recent gains

 

 

Indices Update

There’s a slightly softer tone to European equities and US stock index futures this morning. This could be down to general market torpor as we approach the end of the summer, or reflect some nervousness ahead of Friday’s US Non-Farm Payrolls. While this won’t be the last significant data release before next month’s FOMC meeting, it will be the most important piece of data covering employment. Following Janet Yellen’s hawkish Jackson Hole speech last week, strong number on Friday will increase the chances of the Fed hiking rates next month.

European stock indices fared well yesterday led higher by the banking sector.  Banks rose on the prospect of a US rate hike which should help them attract more savings from customers. The German DAX led the pack and ended the day more than 1% higher. However, the UK’s FTSE100 struggled for most of the session, weighed down by the mining sector and an early sell-off on US stock indices.

Earlier in the day the European Commission (EC) ruled that Apple (APPL) must pay Ireland €13 billion in back taxes, with additional interest.  The EC decided that Ireland had granted undue tax benefits to the tech giant, which is illegal under EU law regarding state aid. However, the Irish government dispute this saying Apple doesn’t owe anything, and both parties intend to launch appeals against the decision.  Apple shares fell around 1% in pre-market trade and closed 0.8% lower. Amazon and McDonald’s are also under investigation by the Commission.

It’s a busy time for the EC which also has to deal with the fall-out from the UK’s Brexit vote back in June and the break-down of trade talks between the EU and the US. Over the weekend Germany's economy minister Sigmar Gabriel said disagreements between the European Union and the US have killed off the Transatlantic Trade and Investment Partnership (TTIP) which would have been the largest bilateral free trade agreement ever.

The major US stock indices ended lower on Friday in a move which was consistent with investors factoring in a larger probability of a September rate hike. However, they bounced back sharply on Monday. This was something of a surprise as the prospect of higher interest rates isn’t good for equity markets generally, although a modest hike may help the banking sector. The dividend yield on the S&P 500 is around 2%. If investors could get a similar return from the bond market without having to take on stock market risk, then they would rush out of equities and into government debt. It may be that equity traders still don’t believe that a September rate hike is on the cards, or they could be taking some comfort from Dr Yellen’s statement that Fed monetary policy was not on a pre-set course. In other words, we shouldn’t expect the Fed to raise rates every quarter as was predicted by the FOMC’s summary of economic projections back in December.

The FTSE 100 ended the day 17.3 points lower at 6,820.8

The German DAX rose 113.2 points or 1.07% to end the day at 10,657.6

The US30 fell 48.7 points to finish at 18,454.3. The S&P 500 lost 0.2% to close at 2,176.1 while the Nasdaq 100 fell 0.3% to close at 4,776

Equities

London-listed mining stocks had a bad day yesterday and filled the top four places on the FTSE100 list of biggest losers. The sell-off came as metals and other dollar-denominated commodities sold off sharply as the greenback shot higher. Antofagasta (ANTO) topped the loser-board and ended the day 5.5% lower at 511.5 pence. Anglo American (AAL) closed down 4.8% at 817.5 pence, Rio Tinto (RIO) fell 4.7% while BHP Billiton (BLT) lost 3.7%.

Commodities Update

Crude prices were higher in early trade yesterday as a tropical storm headed for the Gulf of Mexico. The US Bureau of Safety and Environmental Enforcement said that oil and gas operators in the region had shut down rigs leading to a fall in oil production of over 168,000 barrels-per-day and 190 million cubic feet per day of natural gas. However, this news was later eclipsed by the ongoing rally in the US dollar which weighed on oil and other dollar-denominated commodities. Both Brent and WTI fell below their respective 23.6% Fibonacci Retracements of the August rally. In the absence of a swift recovery, traders may be tempted to push prices lower in an effort to test lower support levels, the first of which come in at $48 and $46 for Brent and WTI respectively.

At the beginning of August we saw a sharp short-covering rally which saw crude rally around 25% and took Brent back above $50 per barrel. This move was triggered by speculation that a number of major producers were set to renew talks of an output freeze. Traders rushed to get long of oil even though a meeting held in April to discuss capping production ended in complete failure. But now it seems that the upside momentum has faded, particularly as it appears that Iran will only cooperate with other producers if they are allowed to carry on raising production back to (or above) pre-sanction levels.

Gold and silver fell sharply again yesterday as the US dollar soared. The greenback shot higher as investors reassessed the likelihood of a rate hike from the US Federal Reserve at their September meeting. The past few weeks have seen hawkish comments from a number of important Federal Reserve members. This culminated on Friday when Janet Yellen delivered her speech at the Jackson Hole Economic Symposium. She said that the case for a rate hike had strengthened in recent months. She went on to say that the US economy was continuing to expand and was close to reaching the Fed’s targets for employment and inflation.

The sell-off in gold led to a break of support around $1,320 and a move back towards $1,300 can’t be ruled out. Meanwhile, the next significant support level for silver comes in around $18.

Forex Update

The US dollar has soared since Fed Chairman Janet Yellen delivered her Jackson Hole speech. The current rally shows that a significant repricing is taking place. Ahead of her speech, the Dollar Index was trading near the lows of a trading range which has now held for eighteen months. Similarly, the EURUSD was approaching the high end of its own trading range while the USDJPY looked set to crash below 100.00.

Despite this, it’s too early to say if this means the dollar is set to strengthen further. It’s much more likely that having tested the lower end of its trading range the dollar was overdue a bounce. The trigger for this was the hawkishness of Janet Yellen and her colleagues at the Fed. So this repricing doesn’t necessarily mean that the likelihood of a September rate hike has increased. According to the CME’s FedWatch Tool, there’s currently a 24% probability that the Fed hikes in September which is about the same as it was prior to the Brexit vote. This rises to 67% for December. Data-wise, we’ve just seen a strong reading for August’s US Consumer Confidence. However, Monday’s headline PCE reading showed inflation running at just 0.8% year-on-year while Core PCE (excluding food and energy) was a 1.6% annualised. By this measure the Fed could say that it has not yet reached its 2% inflation target. Now investors will concentrate on this Friday’s Non-Farm Payroll release. Another strong reading here will see the dollar rally further as the probability of a Fed rate hike before the year-end increases further.

Upcoming events

Today’s significant economic data releases include German, Italian and Euro zone unemployment together with Euro zone CPI. From the US we have the ADP Non-Farm Employment change, Chicago PMI, Pending Home Sales and Crude Oil Inventories. We also have Canadian GDP.

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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