Incisive market commentary from David Morrison

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Expand 2017 <span class='blogcount'>(348)</span>2017 (348)
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Expand December <span class='blogcount'>(23)</span>December (23)
Expand November <span class='blogcount'>(41)</span>November (41)
Collapse October <span class='blogcount'>(37)</span>October (37)
Central banks and US payrolls in focus - Weekly Bulletin
31 Oct 2016
Revised Trading Hours - UK British Summer Time (BST) ends, 30th October 2016
28 Oct 2016
US GDP in focus - AM Bulletin
28 Oct 2016
US stock indices still range-bound
27 Oct 2016
Equities drift on mixed earnings
27 Oct 2016
Earnings season, oil and the US dollar - Video Update
26 Oct 2016
Apple disappoints - AM Bulletin
26 Oct 2016
Silver range-bound - PM Bulletin
25 Oct 2016
Equities up on deals and earnings - AM Bulletin
25 Oct 2016
Spread betting charges – overnight financing - Trading Guide
24 Oct 2016
USD rally continues - Weekly Bulletin
24 Oct 2016
Deutsche Bank trades at pre-DOJ fine levels : AM Bulletin
21 Oct 2016
ECB Decision in less than 400 words - PM Bulletin
20 Oct 2016
Oil’s move to a 15-month high supports global markets - AM Bulletin
20 Oct 2016
Intel buck earnings trend as the Fed takes centre stage again - PM Bulletin
19 Oct 2016
WTI eyes resistance around June highs - PM Bulletin
18 Oct 2016
US/UK inflation data in focus - AM Bulletin
18 Oct 2016
How to know what to spread bet on : Trading Guides
17 Oct 2016
Dollar up on December rate hike speculation - Weekly Bulletin
16 Oct 2016
Oil sparks recovery on Wall Street - AM Bulletin
14 Oct 2016
FOMC minutes - hawkish or dovish? - PM Bulletin
13 Oct 2016
Weak Chinese trade number hits miners - AM Bulletin
13 Oct 2016
US indices range-bound ahead of election - Video Update
12 Oct 2016
FOMC minutes in focus - AM Bulletin
12 Oct 2016
Sterling at fresh multi-year lows : PM Bulletin
11 Oct 2016
Brent crude hits 12-month high - AM Buleltin
11 Oct 2016
How Spread Betting Works : Trading Guides
10 Oct 2016
Another disappointing US payroll report - Weekly Bulletin
09 Oct 2016
Sterling “flash crash” and US Non-Farm Payrolls - AM Bulletin
07 Oct 2016
Non-Farm Payroll look-ahead - PM Bulletin
06 Oct 2016
AM Bulletin: Equities up on data releases and oil
06 Oct 2016
Video Update: OPEC’s production cut promise poses some questions
05 Oct 2016
AM Bulletin: Precious metals slump on USD rally
05 Oct 2016
PM Bulletin: Sterling lurches lower
04 Oct 2016
AM Bulletin: Firmer start for global equities
04 Oct 2016
Trading Guide: How to use Stop Losses in spread betting
03 Oct 2016
Weekly Bulletin: Important week for data releases
03 Oct 2016
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Economic Outlook 

Friday’s US Non-Farm Payroll report showed an increase of 156,000 jobs in September. This was some way short of the 171,000 expected and only slightly better than the prior month’s (disappointing) read of 151,000. In addition, the Unemployment Rate crept up to 5% from 4.9%. The initial market reaction was a pop higher in precious metals and equities, and a fall in the US dollar. The thinking goes that the weak payroll number will help persuade the US Federal Reserve to keep rates unchanged for the rest of the year. Earlier in the week the ADP Non-Farm Employment Change also came in below expectations. It’s generally accepted that the private ADP report is a poor predictor for the Bureau of Labour Statistics’ NFP number. However, any big discrepancies from the expected ADP number should be taken seriously and this proved to be the case this time round. While there will be another two Non-Farm Payroll reports to consider ahead of the Fed’s December meeting, Friday’s number should quash any speculation that the Fed could tighten monetary policy at next month’s meeting. This already seemed most unlikely as that meeting takes place just one week ahead of the US Presidential Election.

Earlier in the week there had been some talk that the European Central Bank (ECB) was preparing to wind down its asset purchase programme before the current end-date of March 2017. The suggestion was that the ECB was planning to reduce its €80 billion monthly bond buying programme in €10 billion steps. The news led to a rally in the euro as any such taper would mean tighter monetary policy in the Euro zone. However, it was difficult to take the story seriously. At the ECB’s last meeting back in September the Governing Council said that its asset purchase programme could run beyond March 2017 “if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.” At the same time ECB President Mario Draghi said the Governing Council’s “baseline scenario (for its macroeconomic projections) remains subject to downside risks.” It’s hard to see anything that has improved enough since then to warrant tighter monetary policy from the ECB. However, the ECB is finding it tough to find enough qualifying bonds to fulfil its asset purchase programme.  In addition, the central bank has faced repeated criticism for its loose monetary policy and is currently being blamed for the parlous state of the European banking sector. Analysts have said that banks like Deutsche just can’t make money with negative interest rates. Nevertheless, at the end of last week Mr Draghi insisted that the bond purchase programme would run until March 2017 (or longer if needed) effectively scotching talk of a taper.

Last week the International Monetary Fund (IMF) released its latest "World Economic Outlook" report. Its latest prediction is that overall global growth will expand at 3.1% in 2016, unchanged from its last forecast in July. But advanced economies (including the US) are expected to slow this year to 1.6% growth, down from both the 2.1% growth recorded last year and the Fund’s July forecast of 1.8%. It’s fair to say that the IMF (along with the Fed and other organisations) has a dismal record when it comes to its economic predictions. Nevertheless, its gloomy prognosis for US growth must cast further doubt on the wisdom of the Fed tightening monetary policy this year.

This week’s major economic releases include:


JPY Bank Holiday; USD Bank Holiday; CAD Bank Holiday; EUR Italian Trade Balance, Sentix Investor Confidence


GBP BRC Retail Sales Monitor; JPY Current Account, Economy Watchers Sentiment; AUD Mid-Year Economic and Fiscal Outlook, NAB Business Confidence, Home Loans; EUR German ZEW Economic Sentiment, Euro zone ZEW Economic Sentiment


AUD Westpac Consumer Sentiment; JPY Core Machinery Orders; CHF ZEW Economic Expectations; EUR Industrial Production; USD JOLTS Job Openings, FOMC Meeting Minutes


CNY Trade Balance; GBP MPC Official Bank Rate, Monetary Policy Summary; USD Unemployment Claims, Import Prices, Crude Oil Inventories


CNY CPI, PPI, Foreign Direct Investment, New Loans; GBP BOE Credit Conditions Survey, Construction Output; USD Retail Sales, PPI, Consumer Sentiment, Inflation Expectations, Business Inventories

Equities Outlook

The US corporate earnings season unofficially kicks off this week when Alcoa (AA) reports after the close on Monday. However, it won’t be until early November that we’ll have a good idea about how the third quarter earnings season is panning out. By then we’ll just be days away from the US Presidential Election. But in advance of the earnings releases, analytics outfit FactSet have some figures which give us a guide on market expectations for stocks within the S&P500. The current consensus for the quarter is for a 2.1% earnings decline when compared to the same period last year. If so, then it would represent the sixth consecutive quarter of year-on-year earnings declines – the first time this has occurred since the third quarter of 2008. Looking ahead, the consensus of analysts’ estimates suggests that companies within the S&P 500 will record year-on-year earnings growth in the fourth quarter. However, it is worth noting that at this time last quarter, analysts were forecasting earnings growth in the third quarter. They gradually dialled down their expectations as second quarter earnings were published.

Investors continue to keep a close eye on Deutsche Bank (DBK). Just over a week ago the stock broke below €10 to trade at its lowest level since listing on the Euronext exchange in 1992. The bank scored poorly in both European and US banking stress tests earlier this year while the IMF identified it as the world’s riskiest systemically significant bank. Then a few weeks ago the US Department of Justice (DOJ) proposed a $14 billion penalty relating to the bank’s involvement in residential mortgage-backed securities ahead of the financial crisis. This was well above the amount pencilled in by analysts and the bank’s own provision which was nearer the $4 billion mark. Subsequently, the German government was forced to deny that it was engaged in an emergency rescue and stories emerged that a number of funds that clear derivatives trades through Deutsche had withdrawn excess cash from the bank. The situation looked dire. However, the stock suddenly rallied following a rumour that the DOJ was prepared to settle for $5.4 billion. Deutsche Bank held up well last week although there has yet to be confirmation that there has been any agreement over the DOJ’s fine.

Commodity/ FX Outlook


Crude oil continued to rally throughout last week. There were a couple of reasons for the oil market to push higher (one understandable and the other a bit dodgy) and I’ll summarise them below. However, it must be remembered that the crude oil futures market is driven by speculation. This means that it often doesn’t take much to trigger moves which are largely technical.

So, first let’s consider a good reason for crude to rally: the unexpectedly large drawdowns that we’ve seen in US inventories over the past few weeks. On Tuesday the American Petroleum Institute (API) reported a 7.6 million decline in US crude inventories. This was the fifth consecutive week of bigger-than-expected drawdowns and came on expectations of a 1.5 million barrel build. The drawdown was partly offset by a build in gasoline stocks. On Wednesday the Energy Information Administration (EIA) confirmed the API data to some extent with a drawdown of 3 million barrels for the week ending 30th September on expectations of a 1.1 million build. This meant that last week US stockpiles fell below 500 million barrels for the first time since January. In addition, Hurricane Matthew is expected to disrupt US oil imports as it hits the Gulf.

The “dodgy” excuse for crude’s rally is OPEC’s announcement that it is committing to an output cut. The proposal could represent a reduction of anything between 240,000 and 740,000 bpd bearing in mind that OPEC pumped out around 33.24 million bpd in August. If the production cut goes ahead, this would be the first time that the cartel has reduced output since the financial crisis in 2008. But OPEC’s announcement was shockingly light on detail. For a start, there’s a very big difference between a daily output cut of 240,000 barrels and one of 740,000 barrels. Then of course OPEC has to decide which countries will be making cuts and by how much. Will Iran, Libya and Nigeria be granted exemptions and will non-OPEC countries like Russia also take part? On top of this how is OPEC going to ensure compliance? All these decisions have been kicked down the road until the next OPEC meeting at the end of November. In the meantime, with crude hovering around $50 per barrel, US shale oil producers have a strong incentive to ramp up production. If so, then crude could struggle to make further gains and it will be interesting to see if any profit-taking comes in as Brent and WTI to retest their August highs of $51.50 and $52.80 respectively.


Gold and silver had a torrid time last week. The two precious metals fell sharply and sliced through a number of significant support levels. The bulk of the sell-off came as the US futures market opened on Tuesday afternoon. This saw gold slump below $1,300 in the first instance and then go on to break below $1,280. Later in the week gold briefly traded below $1,250 (a level last seen ahead of the UK referendum at the end of June) where it appeared to find some support. However, a look at the charts suggested that the next significant support level comes in around $1,240 and a break below here could lead to a pull-back towards $1,200.

Silver lost 10% from its closing level on Friday 30th September to its low point last Thursday. It crashed below support at $19.00, $18.50 and $18.00 and came within a few cents of hitting $17.00. A break below $17 would suggest that a retest of $16 could come quite quickly.

The trigger for the sell-off appeared to be a rally in the dollar following the release of better-than-expected ISM surveys and hawkish comments from Fed members. Taken together these helped to increase the likelihood of a rate hike ahead of the year-end. Then rumours that the ECB was considering tapering its bond purchase programme ahead of the official March 2017 end date did further damage. This brought about the possibility of tighter monetary policy coming simultaneously from the US Federal Reserve and the ECB – a prospect which undermined the argument for holding non-yielding precious metals. But there was also a story a London hedge fund was forced to liquidate its leveraged precious metals holdings. This would explain why such a large part of the move came on the open of the US futures and options market.

Both metals popped higher following Friday’s disappointing jobs report. The weaker-than-expected Non-Farm Payroll number helped to dampen speculation of a Fed rate hike before the year-end. This led to a sell-off in the US dollar which helped to lift dollar-denominated commodities. In addition, the prospect of low interest rates for longer increases the attractiveness of holding gold and silver. This is because low rates help to reduce the lost-opportunity costs of holding non-yielding assets such as precious metals. However, gold and silver pulled back from their best levels following comments from Federal Reserve Vice-Chair Stanley Fischer. At a speech in Washington Stan came up with an absolute gem when he described Friday’s disappointing jobs report as being "pretty close" to a "Goldilocks" number. Ahead of the report the CME’s Fed Watch Tool was pricing in about a 63% probability for a December rate hike. Interestingly, this popped up to 70% later on Friday afternoon. It was around this time that gold and silver turned sharply lower.


There was a tumultuous end to last week’s trade in FX. There was a sterling “flash crash” during Friday’s Asian Pacific session which saw cable lose around 8% of its value in minutes. The GBPUSD was trading around 1.2600 at midnight but then all bids disappeared. FX is not exchange-traded so it is difficult to establish a precise low. But some brokers report the GBPUSD falling below 1.1600. Sterling then bounced back as quickly as it fell although cable then settled in around 1.2400 – roughly 2 cents below its trading level prior to the crash. However, it slipped again in the European session. By mid-morning on Friday it was trading around 1.2350 – a fresh 31-year low (if one discounts the overnight “flash crash”). Of course, the move affected all sterling-related pairs. On some platforms the EURGBP traded above 0.9400 – levels not seen since the nadir of the financial crisis in March 2009.

It’s still unclear what triggered the move, although the lack of liquidity in Asian Pacific forex will have played a part. But whether this was a “fat finger” erroneous order, a large algorithmic trade that went wrong, an unfortunate options play or something else will probably never be known. But what is apparent is that sterling is out of favour with investors and has been ever since the UK voted to leave the EU. One reason is that the Bank of England (BoE) felt it necessary to cut its headline Bank Rate and restart quantitative easing in August. On top of this the BoE have made it clear that they are ready to loosen monetary policy further before the year-end. But sterling also came under pressure after UK Prime Minister Theresa May announced that she would trigger Article 50 before the end of March 2017. Mrs May also indicated that she was ready to put control over migration above access to the single market. The concern is that this will lead to an exodus of banks and other financial institutions from the UK which will lead to falling tax receipts and a further widening of the budget deficit. Chancellor Philip Hammond also told the Tory party conference that leaving the EU was a big threat to the UK’s economy. He now looks set to use Brexit as an excuse to boost infrastructure spending, abandoning his predecessor George Osborne’s plan to eliminate the country’s persistent budget deficit by 2020. Mr Hammond will deliver his Autumn Statement next month.

The dollar made gains last week as investors recalibrated the odds on a Fed rate hike in 2016. Some better-than-expected data releases (Manufacturing and Non-Manufacturing PMIs) along with hawkish comments from Fed members boosted the probability of the US central bank tightening monetary policy ahead of the year-end. However, the dollar dipped on Friday afternoon following the release of the latest US Non-Farms data. There was a payroll increase of 156,000 in September which was some way short of the 171,000 expected and only slightly better than the prior month’s (disappointing) read of 151,000. In addition, the Unemployment Rate crept up to 5% from 4.9%. The poor number helped to dampen speculation of a fed rate hike before the year-end. It certainly should put the kibosh on further talk of an increase in November, ahead of the US Presidential Election.


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: Weekly Bulletin

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