Incisive market commentary from David Morrison

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Expand December <span class='blogcount'>(23)</span>December (23)
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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 

There was a bit of a hiccup in US equity markets in the middle of last week just after the major UK indices traded at fresh record highs. In this respect the European majors sided with the US as all appear to be stuck in ranges that have held since the summer. Meanwhile, UK stocks shrugged off concerns about a “hard Brexit” and instead got a boost from a slump in the British pound. However, there was a clue that the move higher wasn’t solely on the back of sterling weakness as the FTSE250 also got caught up in the rally as well.

It’s estimated that around 80% of FTSE100 revenues come from overseas with the majority of these from the US and Europe. That means that sterling weakness makes these multinationals more competitive leading to higher sales. Also, the proceeds from these overseas sales look good when converted back into sterling. By contrast, it’s estimated that that around 50% of FTSE250 revenues come from the UK. In addition a fair proportion of these companies will import materials from abroad. Sterling weakness doesn’t help them at all. So why were investors hoovering up stocks in the 250? The likely answer is that they expect UK Chancellor Philip Hammond to announce fiscal stimulus measures during next month’s Autumn Statement. Mr Hammond has already abandoned George Osborne’s target of running a budget surplus by 2020. And his speech at the Tory Party conference suggested that he was preparing to announce major infrastructure spending programmes. However, at the end of last week Mr Hammond ruled out a “fiscal splurge” although he still favours supporting the economy in “a measured and balanced way.” Nevertheless, he made it clear that he won’t be making any spending decisions until he has had a chance to assess more data on the state of the post-Brexit economy.

In the middle of last week there was a brief wobble in US equities. The Dow and S&P500 briefly broke below the lower end of their recent trading ranges (18,000 and 2,120 respectively). The sell-off came as investors worried about a weak start to the third quarter earnings season, the prospect of a Fed rate hike before the year-end, the economic ramifications of the UK’s vote to leave the EU, concerns over the pace of China’s economic slowdown and worries over the state of Europe’s banks. On top of that there’s the US Presidential Election to consider (the third and final debate takes place on Wednesday) and some apprehension ahead of this week’s European Central Bank (ECB) meeting (see “Forex” below).

China was back in focus on Thursday after it released its latest Trade Balance. It posted a surplus of $42 billion – well below both the $53 billion expected and $52.1 billion from the month before. Exports fell 5.6% year-on-year on expectations of an increase of 2.5% while imports rose 2.2% against a forecast of +5.5%. This was the smallest trade surplus in six months and raised concerns over the rate of slowdown in the world’s second-largest economy.

This week’s major economic releases include:


EUR Euro zone CPI, German Buba Monthly Report; USD Empire State Manufacturing Index, Capacity Utilization Rate, Industrial Production


AUD Monetary Policy Meeting Minutes; GBP CPI, RPI, HPI; CAD Manufacturing Sales; USD CPI, NAHB Housing Market Index, TIC Long-Term Purchases, Treasury Currency Report


AUD Mid-Year Economic and Fiscal Outlook; CNY GDP, Industrial Production, Fixed Asset Investment, NBS Press Conference, Retail Sales; GBP Claimant Count Change, Average Earnings Index, Unemployment Rate; USD Building Permits, Housing Starts; CAD BOC Monetary Policy Report, BOC Rate Statement; USD Crude Oil Inventories


AUD Unemployment Rate, NAB Quarterly Business Confidence; GBP Retail Sales; EUR ECB Minimum Bid Rate, ECB Press Conference; USD Philly Fed Manufacturing Index, Unemployment Claims, Existing Home Sales, CB Leading Index


GBP Public Sector Net Borrowing; CAD CPI, Retail Sales; EUR Consumer Confidence

Equities Outlook

The US corporate earnings season got underway last week with Alcoa (AA) once again unofficially marking the start. The aluminium giant reported ahead of Tuesday’s open (not after Monday’s close as I stated in last week’s report). The shift in timing comes as Alcoa prepares to split into two separate entities next month. Alcoa will focus on the traditional smelting business while Arconic will produce higher-end alloys. That aside, Alcoa managed to leave investors underwhelmed when it reported third-quarter net earnings of $0.32 per share (excluding special items) and revenues of $5.2 billion. The consensus expectation had been for earnings $0.35 and revenues of $5.3 billion.

Ahead of the earnings season Dover, Honeywell and PPG Industries all announced downward revisions to their earnings and revenue estimates. In fact, looking down CNBC’s “earnings” tab reveals, for the most part, a torrent of woe with H&R Block, Campbell Soup, VeriFone, Lululemon, Barnes & Noble, Oracle, Ascena, General Mills and Micron Technology either reporting or warning of disappointing numbers. On the plus side there were positive surprises from Monsanto, Darden Restaurants, FedEx, Box and Lennar. But while it is still early days, this was shaping up to be a decidedly mixed start for the season.

Then on Friday there was some better news. Citigroup, JP Morgan, PNC Financial and Wells Fargo all posted better-than-expected earnings and revenues. The news helped to lift the broader market which had come under pressure earlier in the week.

It’s worth bearing in mind that until a couple of months ago this was forecast to be the first quarter in a year and a half to register year-on-year quarterly earnings growth. Analysts dialled back on their positive predictions during the second-quarter earnings season so it’s fair to say that once again expectations are low. This should mean that the majority of corporations surprise to the upside. Whether or not this happens, and whether this will be enough to support the major indices remains to be seen.

Commodity/ FX Outlook


There were big swings in oil last week. Crude shot higher on Monday and both Brent and WTI retested the highs last seen in the first half of June. Brent closed above its $52.80 June high – but just for one session. Meanwhile, the front-month WTI contract couldn’t quite push above its own upside target of $51.60. These failures led to a technical pull-back. However, the selling snowballed following the release of an unexpectedly large build in US inventories. On Wednesday evening the American Petroleum Industry (API) reported a 2.7 million barrel increase in crude stockpiles. This was the first rise in six weeks and above the 2 million barrel build expected. In addition, gasoline stocks and those at the Cushing, Oklahoma hub were also sharply higher. The following day the latest inventory update from the International Energy Administration (EIA) confirmed the build in US stockpiles. Crude inventories rose 4.9 million barrels for the week ending 7th October on expectations of a 400,000 barrel build. But this figure was offset to a great extent by sharp decreases in gasoline and distillate inventories. Traders appeared uncertain how to respond to the news initially. However, it wasn’t long before prices began to creep higher. Then both contracts rallied hard in the evening session.

So crude is still butting up against resistance marked by the highs from June. There’s no doubt that both contracts have had a lift from OPEC’s promise of production cuts. However, all the doubts that were raised after the announcement in Algeria last month still persist. Most notably, these are which countries will have to shoulder the cuts; will Iran, Nigeria and Libya be exempt; how will OPEC ensure compliance and will non-OPEC countries such as Russia also take part? In the meantime it appears that every oil-producing country is pumping at full tilt in order to maximise oil-based revenue ahead of the OPEC meeting at the end of November. This is when the cartel is expected to finalise and announce details of the agreement. In the meantime, those June highs remain crucial in determining where oil goes next. If Brent and WTI can break and hold above $52.80 and $51.60 respectively next week, then further gains look possible. Otherwise, we may be in for a spell of consolidation, or even a mild downside correction.


Gold and silver managed to consolidate last week despite ongoing dollar strength. The two metals showed resilience as the greenback rallied on raised expectations that the Federal Reserve will hike rates in December. The minutes of last month’s Fed meeting showed that some FOMC members were concerned about the US central bank losing credibility.  Several participants worried that another delay (in hiking rates) “risked eroding its credibility, especially given that recent economic data had largely corroborated the Committee’s economic outlook.” The minutes also showed that the decision to wait was a “close call” while several members said that they saw a rate hike coming “relatively soon.”

But the Fed is still stuck in a bind of its own making. It has to convince investors that the US economy is strengthening and robust enough to handle a (modest) rate hike. At the same time it has to come up with reasons for continuing to keep monetary policy loose. The trouble is that the Fed is transfixed by the stock market and fears that any hike will lead to a melt-down in equity and bond markets. At the same time the Fed knows it has to push rates up from current levels to build up ammunition for when the next recession hits. But it also knows that it risks hiking into economic weakness. This isn’t just a domestic issue. Fears over the fallout of the UK’s vote to leave the EU(see sterling), trouble within the European banking system (see Deutsche Bank) and a sharp slowdown in China (see last week’s slump in the Trade Surplus) are all major signals of problems to come. These could all be rolled out as excuses in December when the Fed chickens out from hiking once again. Unfortunately, this could also end up confirming the dissenters’ concerns over further damaging the Fed’s credibility.

In the meantime, investors are still nervous of taking on too much exposure to precious metals. There’s still no plausible explanation for the extent of the sudden plunge just over two weeks ago, and no one wants to be on the wrong side of another “flash crash.” But if the two precious metals can consolidate for another week, and the dollar rally takes a breather, we may see some upside before the New Year.


The US dollar rallied sharply last week. The Dollar Index hit its highest level since mid-March, briefly topping 98.00. The EURUSD traded below 1.1000 for the first time since the end of July and the USDJPY also reached levels last seen back then. The greenback continues to get a lift from expectations that the US Federal Reserve will raise its headline interest rate before the year-end. Minutes released on Wednesday from the FOMC’s September meeting appeared to support this view. As was already known three of the FOMC's ten voting members dissented from the final statement which kept the fed funds target capped at 0.5%. Esther George, Loretta Mester and Eric Rosengren voted for an immediate 25 basis point hike. According to the minutes several FOMC members said that the decision to wait was a “close call” and several said that they saw a rate hike coming “relatively soon.” It was also noted that a “reasonable argument” could be made for a hike and that several participants were concerned that another delay “risked eroding its credibility, especially given that recent economic data had largely corroborated the Committee’s economic outlook.” The question now is whether the minutes have raised the probability of a December rate hike enough to push the dollar further up from here.

Now attention turns to Thursday’s ECB meeting and what it may mean for the euro. Two weeks ago there was a story going around that the ECB was discussing how to wind down its bond purchase programme. Then last week there was speculation that the ECB may discuss technical changes designed to maintain its asset-buying programme. As things stand the ECB could run out of eligible debt to buy next year, particularly if it decides to extend its bond-buying programme beyond March. These technical changes would involve discussion of relaxing the capital key. This is a rule forcing the ECB to buy debt in proportion to the size of each Euro zone economy. But abandoning the rule is problematic. For instance, increasing purchases so they were proportional to the volumes of outstanding debt issued by Euro zone countries would lead to accusations that the ECB was subsidising indebted “profligate” peripherals. This wouldn’t go down well in Germany. In addition, the ECB isn’t currently allowed to buy government debt with yields below the deposit rate. Much of the Euro zone yield curve is in negative territory with German bunds particularly affected. Without a change to this rule it could involve buying fewer German bunds.

Meanwhile, sterling continues to come under selling pressure and traders remain nervous following the “flash crash” earlier this month. 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 there are concerns that sterling has further to fall. Back in August the Bank of England (BoE) cut its headline Bank Rate by 25 basis points and rebooted its bond purchase programme, both quantitatively and qualitatively. The BoE also made it clear that they are ready to loosen monetary policy further before the year-end. In addition, Chancellor Philip Hammond 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.


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Posted by David Morrison

Category: Weekly Bulletin

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