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20 Dec 2016
Investors ponder US inflation outlook - AM Briefing
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Markets react to FOMC “dot plot” - PM Bulletin
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Dollar soars on hawkish “Dot Plot” - AM Briefing
15 Dec 2016
FOMC rate decision in focus - Video Update
14 Dec 2016
Countdown to FOMC rate decision - AM Briefing
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US Federal Reserve look-ahead - PM Bulletin
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Federal Reserve begins two-day meeting - AM Briefing
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Bollinger Bands explained - Trading Guide
12 Dec 2016
Crude gaps higher and lifts equities - AM Briefing
12 Dec 2016
Trump surge morphs into Christmas rally - AM Briefing
09 Dec 2016
ECB tapers bond buying programme - PM Bulletin
08 Dec 2016
All eyes on ECB - AM Briefing
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Look-ahead to tomorrow’s ECB meeting - Video Update
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European stock indices surge higher in early trade - AM Briefing
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What is the MACD indicator? - Trading Guide
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Quiet start for European trading - AM Briefing
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Technical Indicators - Moving Averages - Trading Guide
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Italian PM Renzi resigns after losing referendum vote - AM Briefing
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US Non-Farm Payroll update - PM Bulletin
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Non-Farm Payrolls in focus - AM Briefing
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Non-Farm Payroll look-ahead - PM Bulletin
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Crude holds gains after OPEC move - AM Briefing
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 Wednesday 14 December 2016

Countdown to FOMC rate decision - AM Briefing

 

 

Early moves

Investors expect 25 basis point rate hike

But doubts over pace of future tightening

Global stock indices are mixed in early trade this morning, despite a set of fresh record closes for the US majors last night. There’s little motive to add to long-side positions ahead to tonight’s Federal Reserve rate decision. Instead we may see some mild position squaring as some investors adjust their risk exposure ahead of the announcement. We have the latest update on UK employment together with a speech from Bank of England Governor Mark Carney. We also have US Retail Sales, Capacity Utilisation, Industrial Production and Business Inventories. But none of these releases is of enough importance to sway the Fed at this late stage.

The expectation is for a 25 basis point rate hike from the Fed this evening. But most attention will be on the FOMC’s “Dot Plot” in its Summary of Economic Projections. This shows the committee’s predictions for the fed funds rate in 2017 and beyond. Investors will be hoping for a consensus forecast of no more than two 25 basis point hikes next year. Anything more could see investors reduce their exposure to equities ahead of the year-end. However, there’s not much more on the economic calendar ahead of Trump’s inauguration on 20th January. Since the summer investors have brushed aside a number of major “upsets”, namely the Brexit vote, Trump’s election win and the Italian “no” vote in the referendum. So it now looks as if any pull-back is likely to be shallow as investors are geared up (rightly or wrongly) for an era of big spending and tax cuts.

Stock Index Update

US indices hit fresh record highs

Chinese data beats expectations

European and US stock indices soared higher yesterday. The Dow Jones Industrials, S&P500 and Nasdaq100 all hit fresh record all-time highs. Meanwhile, European indices also surged, helped along by Italian banking stocks. Italy’s largest lender by assets, Unicredit, announced a €13 billion cash call for the first quarter of 2017 and is set to cut 14,000 jobs over the next three years. Its shares rose 7.5% in early morning trade. Meanwhile Banca Monte dei Paschi also pushed higher on hopes that it will be able to raise the €5 billion cash in the market and thereby avoid a state-backed bailout. The Italian Treasury has said it is prepared to step in to recapitalize the world’s oldest bank while the European Commission said that it is willing to discuss options for Italian banks and that state support is available within EU rules.

Early yesterday saw the release of better-than-expected economic data from China. Industrial Production and Retail Sales both surprised to the upside and this helped to steady Asian Pacific markets following Monday’s sharp sell-off on the Shanghai Composite. Chinese investors rushed to dump equities after regulators announced plans to clamp down on stock acquisitions by the country’s insurers.

Commodities Update

Crude steadies at higher levels

Gold drops below $1,160

Crude prices steadied yesterday following a rollercoaster session on Monday. Prices soared at the beginning of the week after Saudi Arabia promised “substantial cuts” to take production below the levels they committed to at the end of last month. In addition, non-OPEC producers agreed to cut output by 558,000 barrels per day (bpd) which was slightly below the 600,000 barrel cut requested by OPEC, but close enough to be believable and achievable.

Yesterday morning the International Energy Agency (IEA) released its monthly oil report. In it the IEA predicted that global oil demand would increase at a quicker pace in 2016 and 2017 than previously anticipated. Part of this was due to a reassessment of Chinese demand which is expected to pick up more than previously forecast. This was born out by the release of better-than-expected Retail Sales and Industrial Production from China yesterday morning. However, the IEA said it was too soon to judge the impact of the promised output cuts from OPEC and non-OPEC oil producers.

Gold continues to struggle as the US dollar digs in and consolidates at higher levels. Yesterday gold spent most of the early part of the session trading below $1,160 suggesting that it may have further to fall - technically at least. In fact, it lurched lower soon after the US open. Yet this had less to do with any movement of the dollar and everything to do with the stunning “risk on” rally in equity markets. Investors continue to buy up equities as we head into the year-end. The overriding feeling is that no one wants to be left out of the rally which has built as a number of high risk events passed with very little negative market reaction. So we’ve had the summer’s Brexit vote, Trump’s surprise election win in November and the potentially damaging “no” vote in the Italian referendum. The ease with which investors have brushed these aside has made many people feel that nothing can derail the markets. Consequently, the majority thought is that there’s little reason to hold safe-haven assets such as gold and silver. This view could change quickly.

Forex Update

 Fed expected to hike by 25 basis points

But focus on “Dot Plot” for clues on future hikes

There was relatively little movement across FX markets yesterday as investors prepared themselves for today’s rate decision from the US Federal Reserve. The Fed is expected to raise its headline rate for the first time in twelve months by 25 basis points. However, what remains unclear is how hawkish (or otherwise) the Fed may prove to be in its Summary of Economic Projections. This should prove crucial in determining whether the dollar will push higher from here or consolidate. The consensus view is that the FOMC’s “Dot Plot” forecast for future fed funds rate hikes will coalesce around an additional 50 basis points throughout 2017. Anything more than this would risk causing the kind of market upset we saw at the beginning of this year. That followed on from the Fed raising rates for the first time since June 2006 and indicating an additional 100 basis points-worth of tightening in 2016. However, it’s worth remembering that back in January we also had a surprise yuan devaluation from China and worries about the junk bond market. In addition, the Bank of Japan shocked everyone when it took rates negative at the end of January.

Upcoming events

Today’s main economic event is the US Federal Reserve’s monetary policy decision along with its quarterly Summary of Economic Projections and Janet Yellen’s press conference. Bank of England Governor Carney also delivers a speech. Significant data releases include UK employment data and average earnings. From the US we have Retail Sales, PPI, Capacity Utilisation, Industrial Production, Business Inventories and Crude Oil Inventories.

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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