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PM Bulletin: Chart for the EURUSD
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PM Bulletin: Gold
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PM Bulletin: Crude oil, yen and equities
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Sterling dumps on Brexit fears
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AM Bulletin: Stronger start for global equities
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PM Bulletin: The yen, Nikkei and negative interest rates
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AM Bulletin: Oil and FOMC minutes in focus
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PM Bulletin: WTI and Brent
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AM Bulletin: Equities, USD, oil rally while precious metals slide
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Weekly Bulletin: Yellen keeps us guessing
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PM Bulletin: A multi-year look at the FTSE100
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PM Bulletin: Andrews’ Pitchfork on S&P500
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AM Bulletin: Equities remain vulnerable to further selling
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PM Bulletin: EURUSD – what now?
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AM Bulletin: Yellen fails to calm nerves
11 Feb 2016
PM Bulletin: Yellen steers through Clashing Rocks
10 Feb 2016
AM Bulletin: Yellen testimony in focus
10 Feb 2016
PM Bulletin: Japanese sell-off spooks investors
09 Feb 2016
AM Bulletin: Investors nervous as crude flirts with $30
09 Feb 2016
PM Bulletin: Big “risk-off” moves to start the week
08 Feb 2016
Weekly Bulletin: Investor jitters raises volatility
08 Feb 2016
February: Non Farm Payrolls Out Today
05 Feb 2016
PM Bulletin: Big miss for Non-Farm Payrolls
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AM Bulletin: Non-Farm Friday
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PM Bulletin: Non-Farm Payroll look-ahead
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AM Bulletin: Dollar slumps; oil spikes
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PM Bulletin: Tomorrow’s MPC press conference in focus
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AM Bulletin: Weaker crude weighs on equities
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PM Bulletin: A look at the EURUSD
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 Thursday 11 February 2016

AM Bulletin: Yellen fails to calm nerves

 

 

Indices Update

European equities and US stock index futures were sharply lower in early trade this morning. This followed on from a lacklustre session late on Wednesday when the Dow and S&P closed down but the tech-heavy Nasdaq 100 made gains for the day. Investors were hoping that Fed head Janet Yellen would deliver a dovish testimony before Congress yesterday. But her warnings concerning global growth have spooked the markets. Today’s testimony before the Senate Banking Committee has taken on greater import as it may not prove to be a straightforward rerun of yesterday’s event. However, the damage may have already been done.

Looking at yesterday morning’s price moves, it was almost as if there was nothing to be worried about anymore. European equities and US stock index futures were sharply higher in early trade while oil prices steadied. Meanwhile those bellwether safe-havens, gold and silver, had their chains jerked and were well down on the highs hit on Monday. Deutsche Bank was up over 14% and Tuesday’s near-panic over a repeat of the 2008 banking crisis seemed faintly ridiculous and certainly overdone.

Whatever the situation earlier in the week, investors had to consider the possible outcome of Fed Chairman Janet Yellen testimony before the House Financial Services Committee. So investors were busy booking profits and cutting back their short equity/long precious metals exposure ahead of the event. The expectation was that the Fed chair would assure market participants that all was well with the US economy. In other words, the economy is doing great, but not great enough to raise the Fed Funds rate by any appreciable amount in 2016.

When it came to it she said the usual stuff about the Fed making progress towards its objective of maximum employment and that the FOMC expects inflation to rise to its 2% objective in the medium term. But perhaps the most dovish (and therefore potentially bullish) part of her testimony was this: “Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar.”

In other words, the economy is weakening, suggesting that the Fed won’t hike again next month. However, this may not be enough to calm market fears between now and the next Fed meeting on 15th/16th March. After all, the bond market is already pricing in just one 25 basis point hike for the rest of 2016. If the Fed is still suggesting that additional tightening is on the cards, then the mismatch will lead to a general loss of risk appetite.

The FTSE 100 index closed at 5,672.3 up 40.1 points on the day or 0.7%

The German DAX rose 137.9 points or 1.6% to finish at 9,017.3

The US30 closed down 99.6 points to finish at 15,914.7 The S&P 500 ended at 1,851.9 down 0.4% while the Nasdaq 100 rose 0.5% to close at 3,966.3

Equities Update

The European banking sector staged a strong rally yesterday. German giant Deutsche Bank (DBK) made back all of Tuesday’s losses and closed at €14.58 up 10.2%. The move was triggered by news that Deutsche is planning to buy back several billion euros of its debt. This will be one to watch over the coming weeks as there is no doubt there are serious problems within the global banking system. As noted yesterday, many of the biggest names have lost more than 25% of their market capitalisation since the beginning of the year. Despite numerous regulatory changes since the financial crash, there are fears that non-performing and bad loans are weighing down the balance sheets of many European banks.

Commodities Update

There was a firmer tone to crude oil yesterday although the front month WTI contract remained stuck below $30 per barrel. Along with other market participants oil traders spent the morning preparing for Fed Chairman Janet Yellen’s testimony to the House Financial Services Committee. Crude fell after a transcript of the testimony was released. Traders were quick to pick up on Mrs Yellen’s reference to US financial conditions recently becoming less supportive of growth. In addition, she flagged up risks to the global economy thanks to China and “other foreign economies” as well as lowered expectations for inflation.

But oil suddenly rallied after the release of US inventory data from the Energy Information Administration. This showed a drawdown of 800,000 barrels for the week ending 5th February. The consensus expectation had been for an increase of 3.1 million barrels. But the move higher was short-lived and crude was soon trading back near the day’s lows.

Gold and silver fell in early trade yesterday. The move was part of a general repositioning by investors ahead of Federal Reserve Chairman Janet Yellen’s testimony before Congress. The two precious metals lost further ground once a transcript of Mrs Yellen’s testimony was released. But they soon began to steady and both had just about broken back into positive territory by the European close.

Mrs Yellen’s testimony should be viewed as supportive of precious metals. After all, she made it clear that the growth outlook for the US and globally had deteriorated recently. That would suggest that the FOMC is not in any hurry to tighten monetary policy further, particularly not at its meeting next month. Rate increases tend to weigh on precious metals as investors ditch commodities for financial assets which have a yield or dividend attached. Consequently, if rates are steady at low levels and growth non-existent, it is always possible that further monetary stimulus could be forthcoming, either in the form of lower rates or outright QE.

Forex Update

The dollar rallied following the release of the transcript of Mrs Yellen’s testimony before the House Financial Services Committee. There are two possible explanations for this: either FX traders consider her comments less dovish than the rest of the market, or there were no real surprises in anything she had to say. I’d go along with the latter. The US dollar is simply making back some of its losses since the start of this year. That was when market participants re-evaluated the probability of the US Federal Reserve following up its 25 basis-point December rate hike with four more over the course of 2016. FX traders follow the bond markets more closely than equity investors. Consequently, FX traders have already factored in the shortened odds on there being just one small rate hike this year – at a maximum.

Upcoming events

Today’s significant data releases include Eurogroup meetings and US Weekly Jobless Claims. This afternoon Federal Reserve Chairman Janet Yellen will testify for the second time this week in Washington DC, this time before the Senate Banking Committee.

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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