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16 Sep 2016
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 Friday 16 September 2016

AM Bulletin: Weak US data boosts equities



Indices Update

European stock indices ended higher yesterday thanks to a surge in the major US indices. The trigger for the buying was the release of a clutch of disappointing US data which included Industrial Production, Business Inventories, PPI and the Empire State Manufacturing Index.

Yesterday’s most significant economic release was US Retail Sales. Core Retail Sales (excluding autos) fell 0.1% in August when compared to July which was well below the +0.3% expected. Including autos, Retail Sales fell 0.3% in August against an increase of 0.1% for the prior month. The weak data is expected to negatively affect estimates for third quarter GDP and is further evidence that the US economy is far from healthy. But this seems of little concern to equity investors who piled back into the market on the long side, taking advantage of the recent sell-off. As far as they were concerned, the weak data reduces the likelihood of a Fed rate hike after next week’s FOMC meeting.

As expected, the Bank of England (BoE) announced that it was keeping monetary policy unchanged following yesterday’s meeting. Last month it cut its headline Bank Rate by 25 basis points to 0.25% which was its first interest rate move since early in 2009. Also at last month’s meeting the Bank announced a Term Funding Scheme (TFS) to reinforce the pass-through of the rate cut, expanded its Asset Purchase Facility by £60 billion and said it would buy up to £10 billion of UK corporate bonds. This was a hefty dose of stimulus which a number of commentators deemed excessive. In fact, there was a subsequent rebound in August’s Manufacturing, Services and Construction PMIs which appears to have vindicated the Bank’s critics. It’s almost as if the Bank took this action in an attempt to justify its predictions of economic Armageddon that would surely follow a vote to leave the European Union. So far its forecasts have proved to be overly pessimistic, although it’s fair to say we’re less than three months on from the referendum and the UK government hasn’t even triggered Article 50 which is the formal intention for a country to withdraw from the European Union.

The BoE upgraded its third quarter growth forecast to +0.3% from +0.1% noting that: “Since the August inflation report, a number of indicators of near-term economic activity have been somewhat stronger than expected.” Despite this, the minutes showed that the majority of members expect to vote for a further cut in the base rate before the end of the year. This would likely take the rate to just above zero. It’s almost as if the bright sparks at the Bank would be far happier if the UK economy crashed as a result of the Brexit vote, and confirmed their dismal forecasts.

The FTSE 100 ended the day 57 points higher at 6,730.3

The German DAX rose 52.8points or 0.5% to end the day at 10,431.2

The US30 closed up 177.7 points to finish at 18,212.5 The S&P 500 rose 1% to close at 2,147.3 while the Nasdaq 100 rallied 1.6% to close at 4,819.9


Shares in Morrison’s (MRW) jumped yesterday after the retailer reported its third consecutive quarter of like-for-like sales growth. Pre-tax profits also came in better-than-expected at £143 million for the six months to 31st July – up 13.5% on the same period last year. The company closed a number of underperforming stores which led to a decline in total sales. However, like-for-like sales rose 1.4% for the first half of the year. The retailer credited its new management team for the improvement. The stock ended the day 7.5% higher at 208.1 pence.

Commodities Update

Trade in crude was mixed yesterday although prices managed to push higher towards the European close. However, neither Brent nor WTI managed to make back much of their losses from Wednesday. Both contracts fell sharply following the latest US inventory release from the Energy Information Administration (EIA). The update for the week ending 9th September showed a build in distillate products of 4.6 million barrels. This was the largest increase in eight months. Additionally, gasoline stockpiles rose by 567,000 barrels against an expected drawdown of 1.1 million barrels. The rise in these two elements more than offset a drawdown of 600,000 barrels of crude which defied expectations of a 2.8 million barrel build.  

Investors are also factoring in the International Energy Agency’s (IEA) report from earlier in the week. This provided evidence of a sharp slowdown in global oil demand growth. The IEA downgraded its prediction for demand growth for 2016 by 100,000 barrels to 1.3 million barrels per day (bpd). It also said that it expects any fall in non-OPEC production to be offset by increased OPEC output – specifically Saudi Arabia, Iraq and Iran. On top of this, analysts now expect additional supply to come from Libya and Nigeria.

Gold dropped back below support around $1,320 yesterday. There was no particular reason for its weakness as trade in the dollar was relatively quiet. Meanwhile, silver spent most of the day little-changed and hovering around $19 per ounce. Investors seem unwilling to take on further exposure to either of the two precious metals ahead of the Fed’s key rate setting meeting next week.

Gold and silver should continue to benefit from the current low interest rate environment. However, there has been a sell-off across the global bond market in the past week which 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 on Wednesday. At the end of August Fed Chair Janet Yellen insisted that the case for raising the fed funds rate had strengthened over the last few months. However, the US economic data since her speech at Jackson Hole has been disappointing. August Non-Farm Payrolls came in lower than expected, while Manufacturing and Non-Manufacturing PMIs surprised to the downside. Yesterday the latest update for US Retail Sales also indicated weakness in the sector. Despite all this, investors remain cautious. It looks as if there won’t be any significant moves until after the Fed meeting.

Forex Update

Currency markets were relatively quiet yesterday. Investors seemed reluctant to take on additional exposure ahead of next week’s 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. The latest update for GDP showed annualised growth of just 1.1% annualised in the second quarter. In addition, inflation (as measured by Core PCE) stands at 1.6% annualised – still some way short of the central bank’s 2% target. We’ll get another update on inflation today with the latest CPI reading. Yesterday Retail Sales (including autos) fell 0.3% in August when compared to the prior month. The Core number fell 0.1% on expectations of a 0.3% rise. The weak data saw the probability of a rate hike next week fall to 18% from 22%, according to the fed funds futures market. The dollar spiked lower in the immediate aftermath of the release but it quickly recovered. 

Upcoming events

Today’s significant economic events include Italy’s Trade Balance and Canadian Manufacturing Sales. From the US we have CPI, Consumer Sentiment and Inflation Expectations. There is also a Bank Holiday in China. 


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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