Incisive market commentary from David Morrison

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OPEC agrees to production cut - Video Update
30 Nov 2016
OPEC meeting in focus - AM Briefing
30 Nov 2016
A look-ahead to tomorrow’s OPEC meeting - PM Bulletin
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Mixed start for equities; crude lower - AM Briefing
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ECB warns of uncertain outlook - Video Update
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Slow start as US closed for Thanksgiving - AM Briefing
24 Nov 2016
Gold slumps below key support
23 Nov 2016
Probability of Dec Fed hike hits 100% - AM Briefing
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Sterling slips ahead of Autumn Statement - PM Bulletin
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US stock indices hit fresh record highs - AM Bulletin
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How to read candlestick charts - Trading Guides
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US dollar pulls back from highs - AM Bulletin
21 Nov 2016
Dollar continues to surge - AM Bulletin
18 Nov 2016
Crude rebounds despite inventory rise - PM Bulletin
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Equity rally slows - AM Bulletin
17 Nov 2016
US dollar continues to rally - Video Update
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Dollar holds recent gains - AM Bulletin
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Dollar Index tests resistance - PM Bulletin
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 Friday 18 November 2016

Dollar continues to surge - AM Bulletin



Indices Update

The US dollar has surged higher again overnight in a move which has taken the Dollar Index flying above 101.00. In early trade this morning the EURUSD traded below 1.0600 for the first time since December last year. The latest move has a feel of dollar shorts capitulating. However, that’s not to suggest the greenback can’t rally further.

The question now is what this may mean for global stock indices. It’s worth noting that the Dow has marked time this week following last week’s stunning turnaround and rally. This could be consolidation ahead of another push higher, or a sign that the rally has run its course. It’s worth remembering that rising bond yields and a strong dollar are not particularly positive for US equity markets.

Yesterday Federal Reserve Chair Janet Yellen testified about the economic outlook before the Joint Economic Committee in Washington DC. Dr Yellen told the committee that a rate hike could be "appropriate relatively soon." She also considered the dangers of waiting too long to raise rates, a situation which would mean investors deciding that the Fed was behind the curve.

"Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee's longer-run policy goals" on inflation and jobs, Yellen said. "Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability."

In this situation it would be the markets which lead the Fed - selling bonds and driving up yields and so indicating that the US central bank has lost control of monetary policy. In such a situation the Fed would have to raise rates much faster (and possibly higher) than they would like in order to persuade investors that they were taking back control. Such a situation could be very negative for risk assets. However, Dr Yellen insisted that "the risk of falling behind the curve in the near future appears limited, and gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years."

Her prepared remarks come ahead of the Fed’s key meeting which takes place over 13th and 14th December. There was speculation that the Fed may hold off from raising rates next month if Donald Trump clinched the presidency and markets reacted negatively. However, comments from Fed members this week suggest that the central bank is relatively sanguine about the market reaction. However, it’s probably fair to say that none of them expected equities and the dollar to rally to this extent.

Earlier this week St. Louis Federal Reserve President James Bullard said that a single rate hike (possibly in December) could be enough to “move monetary policy to a neutral setting." In other words, even if the Fed does hike rates next month, it won’t mean it’s the beginning of an aggressive tightening cycle. On Tuesday Robert Kaplan, president of the Federal Reserve Bank of Dallas said that it was time to start raising and "normalizing" interest rates because the low rate environment had distorted markets.

The FTSE 100 ended the day 45 points higher at 6,794.7

The German DAX rose 21.7 points or 0.2% to end the day at 10,685.5

The US30 closed 35.7 points higher to finish at 18,903.8 The S&P 500 ended up 0.47% at 2,187.1 while the Nasdaq 100 rose 0.7% to close at 4,826.6


We’re really at the fag end of the third quarter earnings season now and this is marked by updates from major retailers. Yesterday Wal-Mart, the world’s largest retailer, reported better-than-expected earnings while revenues came in below target. Third quarter sales came in at $118.18 billion. This was a 0.7% increase on the same period last year but below analysts’ expectations of $118.7 billion. Wal-Mart reported earnings per share of $0.98 which was down from the $1.03 reported last year but above the $0.96 per share expected. Digital sales (previously a soft spot) picked up by 20.6% over the quarter, helped by the recent acquisition of But the company released disappointing forward guidance. Wal-Mart shares ended the day down 3.1% at $69.19

Commodities Update

Crude oil had a mixed session yesterday with early gains evaporating as the day’s session progressed. Both WTI and Brent have bounced sharply this week after hitting three-month lows on Monday. The main part of the rally came on Tuesday when crude shot up around 6% for its best one day performance since April. The trigger for the rally was renewed hope that OPEC members will manage to agree to production cuts at its meeting in Vienna at the end of this month. Some OPEC-member energy ministers are planning to meet informally in Doha today in order to set the groundwork for the Vienna meeting.

OPEC and non-OPEC producers will be desperate to push the oil price up ahead of their meeting in two weeks’ time. They will be painfully aware not only of their abject failure to agree to a production freeze back in April, but also that a repeat performance could see crude break below $40 per barrel. This time round global demand growth looks to be slowing while output is at record levels. There’s also been a turnaround in US inventories which have shown significant (and unexpectedly large) builds across the whole energy complex over the last two weeks. Yet as things stand Iran, Iraq, Nigeria and Libya all feel they should be exempt from cuts. If these countries back down then we can expect a big rally in crude. However, even if all parties agree to output cuts, ensuring compliance will be another matter.

Gold and silver marked time for most of yesterday’s session although both pulled back from their best levels as the day wore on. It appeared that the two precious metals were managing to consolidate despite another good showing for the US dollar. However, the greenback’s gains proved relentless. Early this morning the Dollar Index shot above 101 to trade at its best levels in over thirteen years. The dollar continues to find buyers as investors expect inflation to push higher on the back of president-elect Donald Trump’s tax cutting and infrastructure spending plans. The theory is that the US Federal Reserve will have to tighten monetary policy faster than previously expected to ensure that Mr Trump’s proposed fiscal stimulus doesn’t lead to runaway inflation. Given this possibility, it’s perhaps somewhat surprising that gold and silver haven’t rallied on the prospect as both metals can work as effective inflation hedges. However, many investors previously bought precious metals in response to a low-growth, low interest rate deflationary environment. Consequently, they are finding it difficult to adjust quickly to the idea of owning gold and silver as inflation hedges, particularly when the dollar is so strong.

Forex Update

Yesterday morning brought a slight pause in the dollar rally. The Dollar Index slipped back below 100 while the EURUSD pushed back above 1.0700. Even sterling popped higher briefly following a surprisingly strong UK data release. October Retail Sales jumped 1.9% representing their fastest annual rise for fourteen years. While unsustainable, this is yet another UK economic data release to embarrass those agencies and pundits who confidently predicted the immediate collapse of the UK economy following a Brexit vote. This is not to say that everything in the UK (or anywhere else) is all fine and dandy. There are serious concerns going forward. But the call from the UK Treasury, Bank of England, IMF and others was for an immediate collapse in confidence, job losses in the hundreds of thousands and a slump in growth. That has now been shown to be false. As to what happens next, that will unwind whether the UK is in our out of the European Union because the driving forces are global. Bear in mind, the Bank of England may blame Brexit for the sell-off in sterling, but actually it was this vote which has given the Bank exactly what it wanted: a cheaper currency and a pick-up in inflationary pressures. Every single central bank wants the same, yet has been unable to engineer the situation. The Bank has got exactly what it needed in spite of itself.

The dollar resumed its climb as the afternoon session got underway. The greenback was boosted after prepared comments from Fed Chair Janet Yellen were released ahead of her testimony before the Joint Economic Committee in Washington. Dr Yellen said that a rate hike could be "appropriate relatively soon” while noting that there were dangers to waiting too long to raise rates. This could force the central bank to raise rates more quickly than they would like in order to persuade investors that they were in control. Overnight, the Dollar Index broke above 101 to register a fresh thirteen and a half year high. It’s certainly looking overbought but that doesn’t mean it can’t push higher from here in these peculiar times.

Early yesterday the Bank of Japan (BOJ) said it would buy an unlimited amount of 1 to 5 year bonds in order to keep a lid on Japanese government bond (JGB) yields and steepen the curve. This would be the first time the BOJ has undertaken such purchases since September when it announced it would anchor the 10-year JGB yield at zero, effectively controlling the yield curve. The news saw the Japanese yen fall sharply.

Upcoming events

Today’s key economic data releases include German PPI, Euro zone Current Account, Canadian CPI and the US Conference Board Leading Index. We also have speeches from ECB President Mario Draghi, Bank of England MPC member Ben Broadbent, German Bundesbank President Jens Weidmann, and FOMC members James Bullard, William Dudley and Esther George. 


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Posted by David Morrison

Category: AM Bulletin

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