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
29 Nov 2016
Mixed start for equities; crude lower - AM Briefing
29 Nov 2016
An introduction to technical analysis - Trading Guide
28 Nov 2016
Softer tone across risk assets - AM Briefing
28 Nov 2016
Crude, dollar and equities slip in holiday-shortened session
25 Nov 2016
ECB warns of uncertain outlook - Video Update
24 Nov 2016
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
23 Nov 2016
Sterling slips ahead of Autumn Statement - PM Bulletin
22 Nov 2016
US stock indices hit fresh record highs - AM Bulletin
22 Nov 2016
How to read candlestick charts - Trading Guides
21 Nov 2016
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
17 Nov 2016
Equity rally slows - AM Bulletin
17 Nov 2016
US dollar continues to rally - Video Update
16 Nov 2016
Dollar holds recent gains - AM Bulletin
16 Nov 2016
Dollar Index tests resistance - PM Bulletin
15 Nov 2016
Dollar soars as bonds slide - AM Bulletin
15 Nov 2016
What is Swing Trading?
14 Nov 2016
Markets adjust to Trump presidency - Weekly Bulletin
14 Nov 2016
Trump win sees investors rethink their portfolios - AM Bulletin
11 Nov 2016
Equities up, but bonds are down - PM Bulletin
10 Nov 2016
Market responds to Trump win - AM Bulletin
10 Nov 2016
US Election fall-out - Video Update
09 Nov 2016
Markets react to Trump win - AM Bulletin
09 Nov 2016
US Election – possible outcomes and market reaction - Video Update
08 Nov 2016
US election result is all that matters now - AM Bulletin
08 Nov 2016
What is day trading? - Trading Guides
07 Nov 2016
Election uncertainty spooks investors - Weekly Bulletin
07 Nov 2016
Market info update: US Election Market Changes
04 Nov 2016
US Non-Farm Payrolls in focus - AM Bulletin
04 Nov 2016
Non-Farm Payroll look-ahead - PM Bulletin
03 Nov 2016
Equities mixed ahead of BoE Inflation Report - AM Bulletin
03 Nov 2016
Central bank meetings and election polls - Video Update
02 Nov 2016
FOMC rate decision ahead - AM Bulletin
02 Nov 2016
Bounce-back in precious metals - PM Bulletin
01 Nov 2016
RBA and BOJ leave rates unchanged - AM Bulletin
01 Nov 2016
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Economic Outlook 

There can be little doubt that investors are getting very nervous as the US Presidential Election approaches. Last week the dollar fell sharply while the Dow Industrials and S&P500 both broke below the bottom end of their respective ranges which have been in place since early July. Much of this nervousness has been blamed on the FBI reopening its investigation into emails from Hillary Clinton’s private server while she was Secretary of State. This news (together with growing concerns about what’s been going on at the Clinton Foundation) has seen Clinton’s poll lead over Trump shrink to the point of statistical insignificance. The popular view is that a Trump win will be destabilising for the markets whereas a Clinton win (assuming the Democrats don’t manage to win back majorities in both the Senate and House of Representatives) means that life goes on as “normal.”

But this view assumes that there is a clear-cut winner after Tuesday’s vote, and that may not turn out to be the case. For a start, Trump, or indeed Clinton, could refuse to concede and launch a legal challenge over the result. Remember how outraged the world was when, during the third debate, Trump refused to say if he would accept the outcome of the election vote? Well since then there have been numerous reports of voting irregularities, any one of which could be the basis for a legal challenge. Not only that but it’s worth remembering that there are three other candidates in this election. Bearing in mind how unpopular Clinton and Trump both are, it’s not beyond all possibilities that another candidate (Evan McMullin in Utah for instance) manages to grab the electoral college votes of a single state and ends up denying the two main candidates the 270 votes needed for an outright win. The bottom line is that there are quite a few known unknowns, let alone unknown unknowns, which could blast this whole circus out into a fresh dimension. If the Florida “hanging chad” brouhaha from the 2000 Bush-Gore election was unedifying, I think it could get a lot worse this time round. If so, then we could have months of uncertainty and the very real danger of seeing the US more divided and fractious than ever. This wouldn’t be a positive investment environment.

All this comes on top of continued uncertainty as far as the global economic outlook is concerned and the expectation that the US Federal Reserve with raise interest rates at its December meeting. According to last week’s FOMC statement from the Federal Reserve, the case for raising the fed funds rate continues to strengthen. And it could be that a majority of committee members really believe that to be the case. This would be despite the fact that the FOMC downgraded its expectations for consumer spending and inflation. But while inflation (as recorded by core PCE) is picking up towards the Fed’s 2% target (which it has already overshot by some measures - core CPI is 2.2% annualised) and the unemployment rate hovers around 5% (considered optimal by many economists), GDP growth is tepid. Third quarter GDP may have popped up to 2.9% from the prior three months, but the year-on-year growth rate is just 1.5%. On top of this, there’s the European banking sector to consider. Italian banks remain a very real concern while the worst may not be over for Deutsche Bank. Last week the stock fell close to 10%.

Despite all this there can be no doubt that the Fed is preparing markets for a December hike and, while weaker than expected, last Friday’s Non-Farm Payroll number did nothing to knock this expectation. But there is still that nagging feeling that yet again, the US central bank is doing what it has done throughout this year: talking up the economy while refusing to make even the smallest effort in normalising its key interest rate.

This week’s major economic releases include:


JPY Monetary Policy Meeting Minutes, Average Cash Earnings; AUD ANZ Job Advertisements; EUR German Factory Orders, Retail PMI, Sentix Investor Confidence, Retail Sales; USD Labour Market Conditions Index, Consumer Credit


AUD NAB Business Confidence; CNY Trade Balance; JPY Leading Indicators, Prelim Machine Tool Orders; EUR German Industrial Production, German Trade Balance, French Gov Budget Balance, French Trade Balance; GBP BRC Retail Sales Monitor, Manufacturing Production, Industrial Production, Inflation Report Hearings; USD Presidential Election, Congressional Elections, JOLTS Job Openings, Mortgage Delinquencies


AUD Mid-Year Economic and Fiscal Outlook, Westpac Consumer Sentiment; JPY Current Account, Economy Watchers Sentiment Bank Lending; CNY CPI, PPI; GBP Goods Trade Balance; USD Final Wholesale Inventories, Crude Oil Inventories; NZD Official Cash Rate, RBNZ Rate Statement, RBNZ Press Conference


JPY BOJ Summary of Opinions, Core Machinery Orders, M2 Money Stock; EUR French Industrial Production, French Prelim Non-Farm Payrolls, Italian Industrial Production; USD Unemployment Claims, Federal Budget Balance


JPY PPI, Tertiary Industry Activity; EUR French Armistice Day, German Final CPI, German WPI; GBP Construction Output; USD Veterans’ Day, Consumer Sentiment, Inflation Expectations; CAD Remembrance Day.

Equities Outlook

We’ve just passed the peak of the third quarter earnings season, at least in terms of the absolute number of companies reporting. However, there are still plenty of important corporations set to release their results including a number of major US retailers and restaurant groups which should help give an insight into the health (or otherwise) of the US consumer.

There can be little doubt that despite some significant disappointments (the energy sector being amongst them), overall earnings and revenues have so far come in above consensus expectations. However, it’s worth noting how analysts’ forecasts get lowered over time as the relevant earnings season approaches.

Here’s a chart from Michael Lebowitz at 720 Global (via John Mauldin’s “Thoughts from the Frontline” - a free weekly newsletter I highly recommend) using data from Standard and Poors (averages for the 17 quarters from 2Q 2012 through 2Q 2016).

What this shows is that one year ahead of a particular earnings season analysts typically forecast expected earnings growth of around 15%. But this drops off sharply as the earnings season approaches until the growth forecast falls below 2% just ahead of the announcement. Then, typically, the corporation announces earnings growth which comes in ahead of the final forecast and this helps to keep a bid under the stock price.

As an aside, and ahead of this week’s US Presidential Election, there been some coverage given to the following analysis carried out by Sam Stovall, chief investment strategist at CFRA. In an interview with CNBC Mr Stovall noted that, "Going back to World War II, the S&P 500 performance between 31st July and 31st October has accurately predicted a challenger victory 86% of the time when the stock market performance has been negative.” What this means is that, ahead of the election, if the S&P500 is lower at the end of October than at the end of July, there’s an 86% probability that the challenger party (in this case the Republicans under Donald Trump) will beat the incumbent party (the Democrats under Hillary Clinton). Mr Stovall went on to say that the one time in eight that the incumbent party won with a negative stock market was in 1956, when Adlai Stevenson challenged President Dwight D. Eisenhower. That was the year of the Hungarian Revolution and when Britain faced humiliation over the Suez Crisis.

This year, the S&P500 fell 2.29% (2,178 to 2,128) from the end of July to the end of October. So, by this analysis we should expect a Trump win. Hopefully we’ll know by Wednesday.

Commodity/ FX Outlook


In the past fortnight crude oil has given back all the gains made since the end of September. Back then traders piled in on the long side following a surprise commitment from OPEC to cut production. The announcement was made during an International Energy Forum meeting in Algeria and crude flew higher despite a remarkable lack of detail over what is a very complex proposal. Both WTI and Brent subsequently failed to break and hold above the multi-month highs made in early June. This technical failure, coupled with rumours that OPEC and non-OPEC producers were struggling to agree to terms over output cuts. This worries compounded at the end of last week with a report from Reuters concerning increased antipathy between Saudi Arabia and Iran. According to four anonymous OPEC sources, the two countries clashed at a recent meeting in Vienna. Iran is insisting that it should be exempt from any agreement to either cut or freeze production as it continues to rebuild its oil industry after the removal of sanctions earlier in the year. In response, Saudi Arabia has threatened to withdraw from the OPEC meeting scheduled for the end of this month and to raise production to 11 or perhaps even 12 million barrels per day. Saudi Arabia is already producing record amounts of crude. Later on Friday afternoon OPEC's secretary general denied reports of tensions resurfacing between Saudi Arabia and Iran.

Meanwhile, non-OPEC member Russia set a post-Soviet record production high in October of 11.2 million barrels per day. Rosneft Chief Executive Igor Sechin also said that Russia has the potential to further increase oil output by as much as 4 million barrels per day. Putting this all together makes analysts wonder if OPEC’s proposed production cuts will have any material effect on oil prices, even assuming all members can reach an agreement and then stick to it.

Prices had already come under additional pressure after the American Petroleum Institute (API) reported a build in crude stockpiles of 9.3 million barrels - way above the 1.5 million expected and the largest inventory build since March. Then last Wednesday the US Department of Energy’s Energy Information Administration (EIA) recorded an increase of 14.42 million barrels on expectations of a 2 million barrel build. This represented the biggest build in inventories in the whole 34 year history of the EIA data series.

What has surprised many observers is the relentlessness of the sell-off which has yet to see even a modest short-covering bounce. However, WTI and Brent are both testing support around $43.50/44.00 and $45.50/46.00 respectively.


Gold and silver shot higher last week as the dollar retreated from levels last seen in early February - when measured by the Dollar Index.  The rally in precious metals began after the FBI announced that it had reopened its investigation into emails from Hillary Clinton’s private server used while she was Secretary of State. The news saw Clinton’s lead over Trump evaporate in a number of opinion polls. Any hint that Trump may be in with a chance of clinching the presidency after Tuesday’s vote has the potential to upset markets. Ahead of the announcement from the FBI investors had been convinced that Hillary Clinton would win the battle for the White House. This was why the dollar rallied throughout October as Clinton means “business as usual” for Wall Street whereas Trump is considered an unknown quantity.

Last week’s rally in precious metals saw gold push back above $1,300 while silver dug in above $18.00. Gold and silver now need to consolidate at these higher levels to have a chance of making further gains and what happens next will be down to how this week’s election pans out. It’s worth considering that the two precious metals not only made gains thanks to dollar weakness, but also from safe-haven demand. Consequently, if Clinton manages to clinch the presidency with a decent majority of Electoral College votes then we can expect gold and silver to sell off initially. However, both would rally sharply in the now unlikely event that the Democrats win majorities in both the Senate and House of Representatives. A Democratic clean sweep leads to the possibility of a high spending, high taxing administration and considerable market uncertainty. Precious metals should also do well on a Trump victory as the dollar should sell off initially as investors try to work out what a Trump presidency could possibly mean for the US economy. Both gold and silver should also see safe-haven buying in the event of a disputed outcome. The prospect of either candidate refusing to concede and launching a legal challenge over the result is something which hasn’t been priced in.


Perhaps the two biggest stories in FX last week were the pull-back in the US dollar and the bounce in sterling. The Dollar Index has fallen around 1.8% following the news just over a week ago that the FBI was reopening its investigation into Mrs Clinton’s use of a private server for emails while she was Secretary of State. There is also talk that the FBI’s investigation is expanding to include the controversial Clinton Foundation. The dollar found some support after the Fed’s FOMC said that the case for raising its fed funds rate continued to strengthen, which leaves the door open for a rate hike in December. However, the dollar’s bounce was short-lived and it fell further on Friday afternoon. This was despite a relatively benign Non-Farm Payroll report for October which recorded an increase of 161,000. While slightly below the consensus expectation of 174,000 the Unemployment Rate slipped back to 4.9% and Average Hourly Earnings rose 0.4% for the month. The data was good enough to convince investors that the US economy is robust enough to handle a December rate hike from the Fed. However, there’s still six weeks to go before the next FOMC meeting with another payroll report due out before then, not to mention the uncertainty brewing ahead of Tuesday’s presidential election.

Sterling shot higher on Thursday morning after the High Court ruled that the UK government cannot trigger Article 50 without parliamentary approval. The news was a blow to Prime Minister Theresa May who had insisted that it was up to the government alone to initiate Article 50. The government is expected to appeal the decision and the Supreme Court has earmarked December 7 and 8 to hear the case. Nevertheless, the general feeling is that the decision could lead to greater parliamentary involvement in the Brexit process and a possible softening of the government’s negotiating position. 

Sterling made further gains after the Bank of England held off from easing rates further or adding to its Asset Purchase Facility after its monetary policy meeting on Thursday. Back at the beginning of August the Bank’s MPC cut the headline Bank Rate by 25 basis points to 0.25%. At the same time it restarted its quantitative easing programme and suggested that it would cut rates again before the year-end. However, the Bank has now back away from this threat, citing the depreciation of sterling and the risk of inflation significantly overshooting its 2% target while playing down the economic risks of the Brexit vote. The Bank hiked its inflation forecast for 2017 to 2.7%, up from 2.0% in August. It also raised its 2017 GDP forecast to 1.4% from 0.8%. In addition the Bank stated that: “…there are limits to the extent to which above-target inflation can be tolerated." This suggests that tighter monetary policy in future cannot be ruled out.

According to the National Institute for Economic and Social Research inflation as measured by Core CPI could hit 4% in the second half of next year. This would be double the Bank’s 2% target rate and put pressure on the MPC to raise rates. However, this would be problematic as any spike in inflation would come against a backdrop of weak economic growth. It seems more likely that the Bank will be content to let inflation run above target for a while. After all, it has been desperate to create inflation for years. Then, as prices rise and consumers complain, Mr Carney will be able to put the blame on the Brexit vote and sterling weakness.


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Posted by David Morrison

Category: Weekly Bulletin

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