Incisive market commentary from David Morrison

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Market info update: Christmas & New Year's 23rd December 2016 - 2nd January 2017
20 Dec 2016
Investors ponder US inflation outlook - AM Briefing
16 Dec 2016
Markets react to FOMC “dot plot” - PM Bulletin
15 Dec 2016
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
14 Dec 2016
US Federal Reserve look-ahead - PM Bulletin
13 Dec 2016
Federal Reserve begins two-day meeting - AM Briefing
13 Dec 2016
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
08 Dec 2016
Look-ahead to tomorrow’s ECB meeting - Video Update
07 Dec 2016
European stock indices surge higher in early trade - AM Briefing
07 Dec 2016
What is the MACD indicator? - Trading Guide
06 Dec 2016
Quiet start for European trading - AM Briefing
06 Dec 2016
Technical Indicators - Moving Averages - Trading Guide
05 Dec 2016
Italian PM Renzi resigns after losing referendum vote - AM Briefing
05 Dec 2016
US Non-Farm Payroll update - PM Bulletin
02 Dec 2016
Non-Farm Payrolls in focus - AM Briefing
02 Dec 2016
Non-Farm Payroll look-ahead - PM Bulletin
01 Dec 2016
Crude holds gains after OPEC move - AM Briefing
01 Dec 2016
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Early moves

Fed raises rates by 25 basis points - as expected

Then signals three more hikes in 2017

Global stock indices were steadier in early trade this morning and it didn’t take long before buyers began to creep back in again. This followed a general sell-off across the majors following last night’s rate hike from the US Federal Reserve and its accompanying Summary of Economic Projections. The 25 basis point rate rise was expected. However, the consensus view (or hope) amongst investors was that the FOMC’s “Dot Plot” would point to 50 basis points-worth of tightening in 2017. So there was some disappointment when the Committee coalesced around the likelihood of three 25 basis point hikes instead. This led to a surge in the dollar and a sharp sell-off in equities and precious metals.

However, while the dollar is holding onto gains and precious metals are still under pressure, equities appear to be bouncing back. After all, if the fed funds rate ends next year just below 1.25% or 1.50% is really neither here nor there. This is especially the case if the US can look forward to the stimulus of tax cuts, infrastructure spending and less regulation. The danger will come if bond yields shoot higher on fears of inflation taking off. This would be a disaster given the high levels of debt sitting at the base of the global economy.

Stock Index Update

US indices pull back from record highs

Fed more hawkish than anticipated

Global stock indices steadied in early trade this morning following a US-led sell-off last night. The Fed raised rates by 25 basis points, as expected. However, investors were rattled after the FOMC forecast 75 basis points worth of increases next year. The consensus expectation had been for 50 basis points. But it didn’t take long before buyers began to creep back in again. No doubt investors remember that this time last year the FOMC predicted four 25 basis point rate hike in 2016, yet there ended up just being one.

European stock indices drifted lower in early trade yesterday as investors sat on their hands ahead of the US Federal Reserve’s rate decision. Most market participants saw little reason to add to their exposure until they had a chance to hear what the Fed FOMC forecasts for interest rates, growth, inflation and unemployment for 2017 and beyond.

There was some movement in healthcare stocks. These were generally lower first thing following Tuesday’s news that Johnson & Johnson had ended talks with Swiss biopharmaceutical company Actelion. Shares in Actelion fell over 10% at one stage yesterday despite news that French drugmaker Sanofi was interested in some form of link-up.

Commodities Update

Crude slips ahead of Fed decision

Gold steadies around $1,160

Ahead of the Fed’s monetary policy announcement, crude oil pulled back further from the highs hit early on Monday.  This followed the release of the latest US inventory data from the American Petroleum Institute (API). This showed an increase in crude inventories of 4.7 million barrels for the week ending 9th December. This was way above the consensus expectation which was for a decline of 1.6 million barrels. In addition, gasoline inventories showed their biggest rise since January. Then OPEC released a report predicting that, despite promised production cuts, the oil market wouldn’t rebalance until the second half of 2017. Earlier in the week the International Energy Agency (IEA) had forecast that supply and demand would be in balance in the first half of next year. Then yesterday afternoon crude oil rallied off its lows following the latest inventory data from the US Department of Energy. This showed a bigger-than-expected drawdown of 2.6 million barrels against an expected drawdown of 1.4 million barrels. Traders will be keeping a close eye on the WTI contract to see if it can hold above the $52 level. If it can’t, then technically the stage could be set for a significant pull-back.

Gold and silver managed to stage a bit of a comeback yesterday ahead of the Fed’s crucial rate decision. Gold managed to claw its way back above $1,160 which cheered the bulls to some extent. However, there still doesn’t look as if there’s much support between here and last December’s lows around the $1,050 area. Meanwhile, silver continues to hold up relatively well. Yesterday it was up over 1.5% at one stage and trading happily above $17. Chart-wise, silver has made steady upward progress since mid-November with support coming in just above $16. But both gold and silver sold off sharply following the Fed’s decision to raise rates and after the release of its Summary of Economic Projections. The summary included a “dot plot” which suggested the FOMC was more hawkish in their outlook for future rate rises than the market expected. This led to a sharp rally in the US dollar and a corresponding slump in gold and silver.

Forex Update

Fed raises rates by 25 basis points - as expected

“Dot Plot” suggests three further hikes next year

There had been relatively little activity in FX markets on Tuesday and this was put down to caution ahead of yesterday’s Federal Reserve rate decision. However, we did see some pre-meeting movement across a number of FX pairs in yesterday’s European trading session as investors trimmed their exposure ahead of the FOMC statement and summary of economic projections. The US dollar fell against all the majors as some last minute profit-taking crept in. The CME FedWatch Tool calculated a near 100% likelihood of a 25 basis point rate hike directly ahead of the announcement. However, there was plenty of doubt over the outlook for future rate cuts as far as FOMC members were concerned.

Last night the Fed hiked rates by 25 basis points - as expected. But the dollar soared as the FOMC’s Summary of Economic Projections suggested that rates could rise by 75 basis points next year. The consensus view had been that the FOMC’s “Dot Plot” forecast for future fed funds rate hikes would coalesce around an additional 50 basis points throughout 2017. Anything more than this was viewed as risking the kind of market upset seen 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 an unexpected 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. This time round no one seems bothered about the yuan, the Bank of Japan or defaults in the junk bond market. The only worry as far as most market participants are concerned is the fear of bond yields rising should inflation take off. While yields have risen since the summer, they are not yet at danger levels.

Upcoming events

Today’s significant economic data releases and events include Flash Manufacturing and Services PMIs from France, Germany and the Euro zone. From the UK we have Retail Sales and the Bank of England’s latest rate decision and monetary policy summary. From the US we have CPI, Weekly Jobless Claims, the Philly Fed Manufacturing Index, the Empire State Manufacturing Index, Current account and Flash Manufacturing Index.


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Posted by David Morrison

Category: AM Bulletin

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