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AM Bulletin: Equities and oil slip in early trade
31 Mar 2016
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31 Mar 2016
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30 Mar 2016
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30 Mar 2016
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24 Mar 2016
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18 Mar 2016
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17 Mar 2016
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17 Mar 2016
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11 Mar 2016
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04 Mar 2016
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04 Mar 2016
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03 Mar 2016
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02 Mar 2016
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 Thursday 17 March 2016

AM Bulletin: USD down on dovish Fed

 

 

Indices Update

It was a quiet start to the European trading session yesterday morning. There was a slightly firmer tone across equity markets as the oil price steadied and as investors prepared themselves for the US Federal Reserve rate decision.

According to the Federal Funds futures market there was no likelihood of another rate hike to follow on from December’s move. However, there was a feeling that the Federal Open Market Committee (FOMC) would deliver a hawkish statement and talk up the probability of a rate rise at its June meeting. However, investors were taken by surprise to some extent by the cautiousness of the statement which cited concerns of risks to the economic outlook due to tepid global growth. In addition, the Fed’s economic projections signalled that the central bank now expects to raise rates by only 50 basis points this year, rather than the 100 it indicated back in December.

The dollar slumped on the news while precious metals and oil soared. Global stock indices also shot higher initially but came off their best levels towards the US close. Equities are firmer again this morning, buoyed by the prospect of a less aggressive tightening programme from the US central bank. However, there must be some concern over how much upside momentum equity markets have going for them now. Can they continue to climb this “wall of worry” or will they succumb to the drag of slower global growth?

The FTSE 100 index closed at 6,175.5 up 35.5 points on the day, or 0.6%

The German DAX rose 49.6 points or 0.5% to finish at 9,983.4

The US30 closed up 74.2 points to finish at 17,325.8 The S&P 500 rose 0.6% and closed at 2,027.2 while the Nasdaq 100 ended the day up 0.9% at 4,404.2

Equities Update

Yesterday the London Stock Exchange (LSE) and Deutsche Boerse () agreed to an all-share merger, creating Europe's largest securities-markets operator worth around £22 billion. The “merger of equals” would create the world’s largest financial exchange operator by revenue which should be able to stand up to US rivals, although the danger of counter-bids still exists. ICE and CME could both attempt to scupper the deal. The two exchanges plan to cut costs by £354 million over three years. Under the deal, a new U.K. company will be formed with 45.6% being held by LSE shareholders with Deutsche Boerse investors owning the rest. LSE ended the day 1.2% lower at 2,870 pence.

Commodities Update

Yesterday morning crude oil recovered a fair amount of its losses from earlier in the week. There didn’t appear to be much of a reason for the move other than talk of a fresh date being set for a meeting between OPEC and non-OPEC producers to discuss an output freeze.

News that the proposed 20th March meeting was cancelled/postponed earlier in the week led to a flurry of selling. Now it seems a number of producers have proposed a gathering in Qatar on 17th April. Qatari oil minister Mohammed Bin Saleh Al-Sada claimed that around 15 OPEC and non-OPEC producers, accounting for about 73 percent of global oil output, supported a production ceiling. However, Iran is unlikely to be in attendance. While the powers that be are playing this down, it is worth remembering that OPEC member Kuwait (who produces around 3 million barrels per day) has sworn to continue to pump and dump crude if Iran refuses to be a part of an agreement to freeze production at January levels.

Later in the day front month Brent broke back above $40 per barrel. The latest data from the Energy Information Administration showed US crude inventories rose less than expected for the week ending 11th March. Then oil got another lift following a somewhat dovish monetary outlook from the US Federal Reserve. The central bank kept interest rates unchanged and predicted two rises this year, down from four back in December. The dollar slumped on the news.

Gold and silver came under further selling pressure yesterday morning. Investors appeared jittery ahead of the FOMC’s rate decision, statement and economic projections. Once again, gold spent most of the session trading underneath the significant $1,240 level. Meanwhile, silver traded in a relatively narrow range. Both precious metals had to fight against the US dollar which pushed higher throughout the day. The prevailing wisdom seemed to be that the Federal Reserve would hold off hiking rates at this time, but would indicate that they were preparing to raise them again at the June meeting. But then both precious metals surged higher following the release of the Fed’s statement and latest economic projections. These were less hawkish than expected leading to a sharp sell-off in the US dollar.

Forex Update

The US dollar was moderately firmer for most of yesterday’s pre-FOMC session. The greenback strengthened a touch as investors positioned themselves for the Fed’ s rate decision, economic projections and Janet Yellen’s subsequent press conference. The consensus view was that the US central bank would hold off from hiking rates at this meeting but indicate that it would tighten monetary policy further at its June meeting.

But it would have been a painful session for anyone who stayed long of the dollar ahead of the announcement. The Fed left rates on hold (as expected) but the statement was interpreted as dovish as it cited concerns of risks to the economic outlook due to tepid global growth. In addition, the Fed’s economic projections signalled that the central bank now expects to raise rates by only 50 basis points this year, rather than the 100 it indicated back in December.

The dollar slumped on the news while precious metals and oil soared. Meanwhile investors bought up stocks. A number of analysts have said that the Fed chickened out yesterday as it could have raised rates again, and then indicated a pause. However, it could be argued that the Fed has engineered the perfect market response to its dovishness. The dollar is sharply lower and oil higher. These moves take pressure off oil producers and their lenders, emerging economies with large dollar debts and US corporates who do business in non-dollar currencies. At the same time equities are holding up well – for now.

There have been some odd goings-on over at the Bank of Japan (BOJ). On Tuesday morning the BOJ appeared to suggest that the adoption of negative interest rates had been a mistake. BOJ member Takahide Kiuchi said that negative rates impairs the function of financial markets. However, yesterday BOJ governor Haruhiko Kuroda seemed to contradict his colleague when he said that not only would the effects of the negative rate cut take some time to appear, but also that there is room to cut the rate further, by as much as 0.4% to minus 0.5%. His comments led to a sharp sell-off in the yen, so that could be described as a good morning’s work from the governor.

Upcoming events

Today’s significant economic events include the Bank of England’s latest rate decision together with its Monetary Policy Summary. From the US we have the Philly Fed Manufacturing Index, Weekly Jobless Claims and Current Account. The minutes of the Bank of Japan’s meeting at the end of January (when it narrowly voted to adopt negative interest rates) will be released overnight.

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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