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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

European stock indices storm higher

State solution most likely for troubled Italian banks

European stock indices are all firmer this morning continuing their rally from the start of the week. Investors continue to hurl money into equities - some in the belief that a pick-up in economic growth and inflation is imminent, others because they are desperate for any kind of return in a low-yield world. The sell-off across global bond markets since the summer has only intensified the shift into equities, leading to a succession of record closing highs for all the US major indices. Yet even the Italian FTSE/MIB has been caught up in the seemingly indiscriminate buying. This comes on the back of vastly increased risk in the Italian banking sector which has the potential to cause significant damage to other major European banks. But the current thinking is that the Italian “no” vote in Sunday’s referendum makes a government intervention with regards to Banca Monte dei Paschi more likely than a market solution. While this will require some EU fudging to circumvent rules regarding government banking rescues, that’s hardly the biggest obstacle in sight. The thinking goes that because Deutsche Bank remains in dire straits, there will be little German opposition to a loosening of the rules in Italy’s favour. After all, the German government may soon have to step in to rescue one of the world’s most systemically important and risky financial institutions.

Stock Index Update

European banks surge despite worries

Italian PM Renzi delays resignation

It was a quiet start to yesterday’s European trading session. However, there then followed a rally which saw all the major European stock indices end the day in positive territory. However, the rally wasn’t exactly broad-based. The Italian FTSE/MIB fared best adding close to 4% on the day. Then came significant gains for the Spanish IBEX (+2.6%) and French CAC (+1.3%). The German DAX rose 0.8% while the UK’s FTSE100 was little-changed. The gains were driven by a rally in banking stocks with Italy’s Unicredit up over 9% and Germany’s Deutsche Bank up close to 7%. Even the troubled Banca Monte dei Paschi

Italian Prime Minister Matteo Renzi has agreed to delay his resignation until after the country's 2017 budget has been approved. This could be sorted out before the year-end. Nevertheless, it still reduces the risk of a snap election which could have followed Mr Renzi’s drubbing in Sunday’s referendum. The concern is that a sudden election could lead to significant gains for anti-EU parties such as Five Star raising the possibility of Italy’s withdrawal from the Euro zone. This would be a disaster for the EU. So any chance that early elections can be averted helps to lift sentiment.

However, risks to the banking system continue. Italy’s banking system is weighed down by an estimated €360 billion of non-performing loans and a number of troubled banks are currently preparing to tap investors for additional capital. But this will be much more difficult given the renewed political uncertainty.  Yet there is an expectation that ECB President Mario Draghi will extend the bank's €80 billion per month bond-buying programme by another six months.

Commodities Update

Crude rally stumbles

Precious metals steady in lacklustre trade

Crude pulled back sharply yesterday. The sell-off followed on from a volatile session on Monday when both Brent and WTI hit their best intra-day levels since July 2015. Looking at the charts, Brent appeared to be powering ahead last week after breaking above resistance around the $53 level. However, WTI failed to fully confirm the break-out. After bursting above $52 and making a fresh 16-month high yesterday, WTI suddenly reversed direction. Sellers rushed in to push prices lower and it now seems that $52 could prove to be the significant number as far as both WTI and Brent are concerned. After all, Brent won’t be able to rally on its own, and $52 is beginning to look like a significant resistance level for WTI.

But the move wasn’t purely technical. Both contracts looked overbought and crude generally needs a trigger to change direction. This time round traders were thrown by news that OPEC production hit a fresh record high in November of 34.19 million barrels per day. This comes on top of yesterday’s report that Russian output hit a post-Soviet record of 11.12 million bpd in November. This suggests that OPEC’s commitment to cut production by 1.2 million bpd, along with Russia’s promise to gradually reduce output by 300,000 bpd won’t be enough to make a dent in existing inventories. Adding to bearishness, Glencore CEO Ivan Glasenberg said prices could drop to $35 if US shale producers were to ramp up output.

Gold managed to steady yesterday, albeit at levels not seen since early February this year. On Monday gold sold off sharply despite a pull-back in the US dollar which would usually help to lift precious metals. It just feels as if every bit of market volatility is seen as an excuse to slap down the gold price.

It’s been a very frustrating time for gold buyers. There’s been a string of major “risk-on” events since the summer - the Brexit vote, Trump’s election win and Matteo Renzi’s failure to win his referendum over constitutional reform. All these should combine to increase gold’s attractiveness as a safe haven. Yet instead, gold has lost around 15% since early July. Much of its losses are down to the dollar’s rally of course. And much of the dollar’s rally is down to the expectation of tighter monetary policy from the Fed and increased inflation expectations. Maybe gold needs to get next week’s rate hike out of the way to finally reach the end of this seemingly relentless sell-off.

Forex Update

USD rallies after initial sell-off

Euro slips on Italian election fears

There was plenty of volatility in FX yesterday. The US dollar was weaker in early trade and the Dollar Index slipped back below 100 for only the second time in the last three weeks. Much of this move was down to euro strength as investors shrugged off concerns that Sunday’s Italian referendum result would lead to early elections. However, the euro suddenly dropped (and the dollar rallied) following reports in Italian newspapers that Matteo Renzi may remain Prime Minister for just a few more weeks before potential early elections in January-February of 2017. According to La Repubblica, Renzi could request a General Election is held early next year in return for staying on and ensuring some sort of temporary political stability. Even if these reports prove wide of the mark Italian President Sergio Mattarella has asked Mr Renzi to delay his resignation until the Senate passes his government's 2017 budget. Mattarella also signalled that he won't call snap elections in response to the referendum results as it would take time to find the right solutions.

The euro also got some support after former Bundesbank head Axel Weber said that the European Central Bank (ECB) could halt its bond purchase programme sooner than the market expects, and then start hiking rates by September next year. The ECB meets this Thursday when it is expected to extend the programme by a further six months.

Upcoming events

Today’s key economic data releases and events include German Industrial Production, Italian Unemployment, UK Manufacturing and Industrial Production. From the US we have Crude Oil Inventories and Consumer Credit.


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Posted by David Morrison

Category: AM Bulletin

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