Incisive market commentary from David Morrison

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Collapse 2017 <span class='blogcount'>(348)</span>2017 (348)
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Market awaits Trump, and Fed reaction
28 Feb 2017
Markets on hold ahead of Trump speech to Congress - AM Briefing
28 Feb 2017
Fibonacci Retracement - an introduction - Trading Guides
27 Feb 2017
Investors shrug off concerns ahead of Trump speech - AM Briefing
27 Feb 2017
Equities drifting lower ahead of weekend - AM Briefing
24 Feb 2017
Dollar sells off after FOMC minutes - Video Update
23 Feb 2017
FOMC minutes send dollar lower - AM Briefing
23 Feb 2017
Crude oil pushes up against resistance - Video Update
22 Feb 2017
FOMC minutes in focus - AM Briefing
22 Feb 2017
Gold pulls back from resistance - PM Bulletin
21 Feb 2017
US traders return after market holiday - AM Briefing
21 Feb 2017
Identifying market tops, or the trend is your friend - until it isn’t
20 Feb 2017
Kraft Heinz pulls Unilever bid - AM Briefing
20 Feb 2017
Major indices drifting lower as weekend approaches - AM Briefing
17 Feb 2017
US Indices hit fresh record highs
16 Feb 2017
Trump tax promise continues to drive risk appetite - AM Bulletin
16 Feb 2017
Yellen testifies in Washington
15 Feb 2017
Yellen testimony helps lift sentiment - AM Bulletin
15 Feb 2017
Silver hovers around resistance at $18
14 Feb 2017
Focus turns to Yellen’s testimony in Washington
14 Feb 2017
An introduction to the Relative Strength Index - Trading Guides
13 Feb 2017
Equity rally continues - AM Briefing
13 Feb 2017
Trump tax talk boosts risk appetite - AM Briefing
10 Feb 2017
US dollar drivers - Video Update
09 Feb 2017
Recovery in crude lifts equities AM Briefing
09 Feb 2017
Crude volatility picking up - Video Update
08 Feb 2017
Crude lower as inventories soar - AM Briefing
08 Feb 2017
Politics set to drive FX - PM Bulletin
07 Feb 2017
Major indices drift in featureless trade - AM Briefing
07 Feb 2017
MACD - an overview -Trading Guide
06 Feb 2017
European equities drift in quiet trade - AM Briefing
06 Feb 2017
Non-Farm Payrolls in focus - AM Briefing
03 Feb 2017
Non-Farm Payroll look-ahead - Video Update
02 Feb 2017
BoE meeting in focus - AM Briefing
02 Feb 2017
FOMC meeting tonight - Video Update
01 Feb 2017
Markets steady ahead of Fed meeting - AM Briefing
01 Feb 2017
Expand January <span class='blogcount'>(39)</span>January (39)
Expand 2016 <span class='blogcount'>(483)</span>2016 (483)
 Thursday 02 February 2017

BoE meeting in focus - AM Briefing



Early moves

·         Bank set up upgrade growth forecasts

·         US Federal Reserve more dovish than expected

There was a weaker tone across European stock indices first thing, but many have now bounced off their lows. At the time of writing only the DAX was in negative territory, pressured by weakness in Deutsche Bank after it posted a €1.9 billion loss for the fourth quarter.

The Bank of England’s Monetary Policy Committee releases its latest rate decision along with its quarterly inflation report at midday. The expectation is that the Bank will upgrade its growth and inflation forecasts, blaming post-Brexit sterling weakness.

Last night we had the first Fed monetary policy meeting since December when it hiked rates for only the second time in 10 years. There was no hike last night, as expected. But the accompanying statement was more dovish than expected. Fed members downgraded their inflation expectations. This was something of a surprise given the concerns raised by Janet Yellen back in December over Trump’s fiscal stimulus and the inflationary consequences.

Stock Index Update

·         Wall Street firmer after dovish Fed statement

·         European indices end mixed

The major US indices ended yesterday moderately higher after the Federal Reserve appeared to discount the possibility of a rate hike next month. There was also some good corporate news with a strong set of revenues and earnings helping to lift Apple by 6%. After the bell, Facebook also reported strong numbers. The stock rallied in after-hours trade but has since pulled back.

Yesterday brought another mixed close for European stock indices. There were respectable gains for the German DAX, French CAC and Italian FTSE/MIB and modest losses for the Spanish IBEX and UK’s FTSE100. The FTSE has now lost just over 3% since it hit a fresh record high two weeks ago. For the most part, these losses have accumulated at much the same slow rate as they were made throughout December.

Meanwhile the US majors are all trading little more than 1% away from their own record closes. Many of the major sentiment indicators have perked up sharply since Trump’s election. There was more evidence of this yesterday when the latest ISM Manufacturing PMI came in at 56.0 in January, well above the prior reading of 54.7. But the so-called “hard data” hasn’t been so strong. Fourth quarter GDP disappointed when it came in at 1.9%. Recent Durable Goods and Retail Sales have also come in below expectations. But yesterday saw the release of a strong ADP payroll number for January. The ADP data doesn’t have a particularly strong correlation with the government’s Non-Farm Payrolls. However, it is good at predicting the overall direction. Consequently, yesterday’s impressive beat suggests we should get a robust reading on Friday.

Commodities Update

·         WTI and Brent rally despite inventory builds

·         Precious metals slide as dollar firms

Crude oil rallied for the second consecutive session yesterday. Prices pushed higher despite unexpected builds in US inventories. After Tuesday’s close the American Petroleum Institute (API) showed large builds in crude, gasoline and distillates. These stockpile increases were confirmed yesterday following the latest inventory update from the US Department of Energy’s Energy Information Administration (EIA).  Crude stockpiles registered their biggest build since October, while this gasoline inventories rose for the fifth successive week. This data goes some way to show the effects of increased US production. US shale oil production is on the rise, contributing to a 6.3% increase in overall US output since last summer. Meanwhile the oil and gas rig count continues to rise with services provider Baker Hughes reporting that the number of active rigs is now at its highest level since November 2015. Both WTI and Brent prices fell in the immediate aftermath of the releases but recovered quickly.

Gold and silver were both modestly firmer in early trade yesterday. However, they sold off sharply as the US open approached and the dollar rallied. There was some speculation that the Fed’s FOMC statement could provide clues over the timing of future rate hikes. Back in December the FOMC forecast that its fed funds rate would be 75 basis points higher by the end of this year. However, ahead of yesterday’s decision and statement the CME’s FedWatch Tool was suggesting that the first 25 basis-point hike wouldn’t happen until June. If so, then that would indicate that there would be two further quarter point rises before the year-end. But much now depends on what President Trump can push through in terms of fiscal stimulus. If he can drive through significant tax cuts together with a large infrastructure spending programme then we can expect inflation expectations to pick up, the dollar to rise and precious metals to slide.

Forex Update

·         USD falls after dovish Fed minutes

·         Dollar Index back below 100

The dollar fell sharply yesterday evening after the Fed signalled it was in no hurry to hike rates further. There had been some expectation that the US central bank was prepared to raise rates at its March meeting. This view had strengthened recently in the light of raised inflation expectations due to Donald Trump’s proposed fiscal stimulus. However, the Fed’s minutes suggested that inflation was less of a worry than it had been at the December meeting.

By mid-afternoon yesterday the dollar was up sharply against the euro, Japanese yen, Swiss franc and Canadian dollar. The Dollar Index briefly topped 100 representing a decent recovery from earlier in the week. The index was helped along by some better-than-expected US data. The ADP Non-Farm Employment Change rose by 246,000 - way above the 165,000 expected. Later on the ISM Manufacturing PMI came in at 56.0 which was a solid improvement on the prior month’s reading of 54.7. The ISM Non-Manufacturing PMI is published on Friday. The ADP number is generally not a good predictor of the government’s own Non-Farm Payroll number, which is also published on Friday. Nevertheless, it can help in forecasting the overall strength or weakness of the official NFP data. Consequently, investors shouldn’t be surprised if Friday’s number comes in well above the consensus estimate of 170,000.

Investors are fixated on the dollar currently. This is hardly surprising given the constant stream of comments from the Trump administration concerning the dollar’s unwelcome strength and how the US’s trade partners have been taking unfair measures to weaken their own currencies. Yesterday Japanese policymakers hit back at President Trump's accusation of currency manipulation and insisted that Tokyo was abiding by a G20 agreement to refrain from competitive devaluations. German Chancellor Angela Merkel pointed out that the European Central Bank is responsible for the euro, and that the German government has long upheld the ECB’s independence. China is yet to respond, no doubt wishing to keep a dignified silence over Golden Week.

Upcoming events

Today’s significant economic data releases and events include UK Construction PMI, Spanish Unemployment Change and Swiss Retail Sales. From the Euro zone we have PPI, the ECB Economic Bulletin and the European Commission’s Economic Forecasts. We also have the Bank of England’s (BoE) rate decision, inflation report and a press conference from BoE Governor Mark Carney. From the US we have Weekly Jobless Claims.


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Posted by David Morrison

Category: AM Bulletin

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