Incisive market commentary from David Morrison

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AM Bulletin: Markets rise for the second day ; back to pre-referendum levels, sterling still weak
30 Jun 2016
AM Bulletin: Confidence returns – but for how long?
29 Jun 2016
AM Bulletin: The onslaught continues – and we’re not just talking the football
28 Jun 2016
Weekly Bulletin: Investors rattled by Brexit vote
27 Jun 2016
PM Bulletin: Brexit - Referendum fallout
24 Jun 2016
AM Bulletin: We’re out! And so is Cameron
24 Jun 2016
Video Update: #AskSpreadCo - EU referendum
23 Jun 2016
AM Bulletin: Markets on tenterhooks ahead of UK vote
23 Jun 2016
Spread Betting Tips
22 Jun 2016
AM Bulletin: Risk assets waft higher
22 Jun 2016
PM Bulletin:Referendum and Market Reaction
21 Jun 2016
PM Bulletin: Gold and the referendum
21 Jun 2016
AM Bulletin: Yellen testimony in focus
21 Jun 2016
PM Bulletin: Janet Yellen’s testimony
20 Jun 2016
Weekly Bulletin: It’s all about the referendum
20 Jun 2016
Market Info Update: EU Referendum Margin Changes - CFDs
17 Jun 2016
Market Info Update: EU Referendum Margin Changes - Spread Betting
17 Jun 2016
PM Bulletin: Forecasting the referendum result
17 Jun 2016
AM Bulletin: Central banks leave rates unchanged
17 Jun 2016
PM Bulletin: FOMC post-mortem
16 Jun 2016
AM Bulletin: Yen, precious metals soar post FOMC/BOJ
16 Jun 2016
PM Bulletin: FOMC look-ahead
15 Jun 2016
AM Bulletin: FOMC meeting ahead
15 Jun 2016
PM Bulletin: European equities slide
14 Jun 2016
AM Bulletin: Stocks down on oil, growth fears and UK referendum
14 Jun 2016
Weekly Bulletin: FOMC and BOJ meetings in focus
13 Jun 2016
PM Bulletin: Markets rattled by slide in bond yields
10 Jun 2016
AM Bulletin: European stock indices drift lower
10 Jun 2016
PM Bulletin: WTI at $50 – thoughts on US production
09 Jun 2016
AM Bulletin: Precious metals soar
09 Jun 2016
PM Bulletin: S&P closes in on all-time high
08 Jun 2016
AM Bulletin: Investors in limbo ahead of Fed and UK vote
08 Jun 2016
PM Bulletin: Yellen and the jobs data
07 Jun 2016
PM Bulletin: Fresh polls send sterling lower
06 Jun 2016
Weekly Bulletin: Rate hike? What rate hike?
06 Jun 2016
PM Bulletin: A dismal Non-Farm Payroll number
03 Jun 2016
AM Bulletin: Non-Farm Payroll Friday
03 Jun 2016
PM Bulletin: Non-Farm Payrolls look-ahead
02 Jun 2016
AM Bulletin: OPEC, ECB, key data releases and central bank speakers
02 Jun 2016
PM Bulletin: OPEC and the oil price
01 Jun 2016
AM Bulletin: Manufacturing PMIs in focus
01 Jun 2016
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Indices Update

Global stock indices flew higher yesterday as investors recalibrated the odds on the UK voting to stay part of the EU this Thursday. Polls indicated that the “Leave” campaign was losing its upside momentum that had been building over the last fortnight. Some commentators felt that the killing of Labour MP and prominent Remain campaigner Jo Cox was the catalyst for the shift. This feeling grew following the bizarre court appearance of her suspected attacker on Saturday.

It is also fair to say that investors are treating the polls with caution. Even though “Leave” built a significant poll lead in recent weeks, it probably still isn’t big enough to indicate a win on referendum day. Firstly, there are too many voters who are still undecided. Secondly, and linked to this, people are generally fearful of moving outside their comfort zones. They know what it’s like being in the EU, but worry about life outside it. This makes a vote to remain more likely, in my opinion.

But that’s not to say the markets are fully discounting a win for “Remain”, or that it will actually happen. Consequently, we must be mindful that markets will continue to be volatile and that there will be periods of illiquidity. With that in mind, it’s good to be cautious this week. Yesterday’s “risk-on” move could signal that the market is pricing in a victory for “Remain.” Alternatively, it could just be a bout of position-squaring following last week’s sell-off.

Later today US Federal Reserve Chair Janet Yellen will testify on the semi-annual Monetary Policy Report before the Senate Banking Committee. Tomorrow she testifies before the House Financial Services Committee. Dr Yellen will face questions from both sets of committee members which may cover areas of monetary policy that she’d rather avoid. Dr Yellen has recently faced questions over the Fed’s credibility and she will have to do something to restore the US central bank’s tarnished reputation.

The FTSE 100 index closed up 253.5 points or 3.0% at 6,204

The German DAX rose 411.6 points or 3.4% to end the day at 9,962

The US30 closed up 129.7 points to finish at 17,804.9. The S&P 500 rose 0.6% to close at 2,083.3 while the Nasdaq 100 rose 0.6% to close at 4,400.2


Understandably, there were very few losing stocks across Europe yesterday. The FTSE100 ended 3% higher with the banking sector heading up the leader board. This made perfect sense given how banking stocks have been under pressure due to Brexit fears. Lloyds (LLOY) was the best performer and ended the day 7.6% higher. RBS (RBS) closed up 7% while Barclays (BARC) tacked on 6.7%

Commodities Update

Early yesterday crude built on its gains from Friday and Brent pushed back above $50 per barrel. Like other financial markets oil appears to be trading in a “risk on/risk off” manner ahead of this week’s UK referendum on EU membership. By last Thursday morning both WTI and Brent had given back around 10% of this year’s gains in the space of one week. The sell-off was linked to uncertainty as a succession of polls showed the “Leave” campaign gaining ground over “Remain.” However, support for the Brexit vote appears to be slipping as we go into the last few days of the campaign and this has led to a spate of short-covering and position squaring ahead of the main event. What is unclear now is if the buyers will continue to come in and push prices up further. There are a number of polls due out between now and Thursday and it seems likely that a further erosion in support for “Leave” will translate into higher oil prices. However, anything suggesting a hardening in support for a Brexit should put further pressure on crude.

But it’s worth remembering that Federal Reserve Chair Janet Yellen testifies in Washington today and tomorrow. Last week saw the central bank downgrade its forecasts for US economic growth, releasing a statement and summary of economic projections which were more dovish than expected. If Dr Yellen manages to convey confidence in the US economy while offering a credible excuse for the FOMC’s reluctance to raise rates, then oil should have further upside potential.

Gold fell sharply yesterday and pulled back further from the near-two year high it hit in the middle of last week. Despite this, it managed to hold on above $1,280 on a closing basis. This level has acted as both support and resistance over the last four months or so. Surprisingly, silver held up well relative to gold and spent most of yesterday trading around $17.50 where it closed on Friday evening.

Precious metals have had a strong run so far this month with both reversing losses they suffered back in May. Much of the gains followed the dismal Non-Farm Payroll in early June. The weak jobs data effectively pushed back expectations for tighter monetary policy from the Fed this summer. This was confirmed last week when the US central bank held off from hiking rates and downgraded their outlook for US economic growth. There is still an expectation of one or perhaps two rate hikes this year from the Fed, according to its latest Summary of Economic Projections. However the market view is considerably more dovish.

Some of this month’s rally in precious metals has been due to safe-haven buying ahead of Thursday’s UK referendum on EU membership. Consequently, much of yesterday’s pull-back can probably be blamed on position-squaring as the “Leave” campaign appeared to falter. 


Forex Update

Sterling shot higher yesterday morning as investors recalibrated the odds on the UK voting to stay part of the EU this Thursday. Polls indicated that the “Leave” campaign was losing the upside momentum that had been building over the last fortnight. Three out of six polls published over the weekend indicated a softening in support for “Leave.” Some commentators felt that the murder of Labour MP and prominent Remain campaigner Jo Cox was likely to contribute further to a shift towards “Remain.”

The euro also made gains against most of the majors, except sterling. Meanwhile the Japanese yen and Swiss franc fell as investors apparently recovered their risk appetite. But it’s worth considering that yesterday’s moves were just an example of the volatility we can expect until the referendum result is confirmed on Friday. The majority of investors won’t want to be over-exposed to dramatic market moves. That means they will be sitting on their hands and applying hedges, rather than trading actively. This leaves the door open for day traders, high frequency algorithms and the like. So we have reduced market liquidity alongside increased volatility – that suggests some big swings ahead. The caveat to all this is if the trade really becomes one-directional in the event that the market convinces itself that, say, a “remain” vote is certain. If so, and assuming the market is correct, there may be precious-little follow-through once the result is known.

In other news, Japanese exports fell for an eighth consecutive month in May as the Kumamoto earthquake led to supply chain disruptions. Overseas shipments were down 11.3% from the same period last year.

Yesterday Bank of Japan (BOJ) Governor Haruhiko Kuroda acknowledged for the first time that the central bank had failed to hit its inflation target in the two-year time frame set in 2013. His comments have increased market expectations for more stimuli in coming months. Last week the BOJ refrained from adding additional stimulus and the yen shot higher. The BOJ is next set to meet on 28th/29th July. 

Upcoming events

Today’s significant data releases and events include the German Federal Constitutional Court ruling on the constitutionality of the ECB's Outright Monetary Transactions policy (OMT), German ZEW Economic Sentiment, Euro zone ZEW Economic Sentiment, a speech from ECB President Draghi and the UK’s Public Sector Net Borrowing. Later on Fed Chair Yellen is due to testify on the Semi-annual Monetary Policy Report before the Senate Banking Committee in Washington DC. 


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Posted by David Morrison

Category: AM Bulletin

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