Incisive market commentary from David Morrison

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Collapse 2017 <span class='blogcount'>(348)</span>2017 (348)
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Investors on edge after Wall Street sell-off
30 Jun 2017
Central bankers keep traders guessing - Video Update
29 Jun 2017
Markets mixed ahead of weekend - AM Briefing
23 Jun 2017
Investors concerned over oil sell-off - AM Briefing
22 Jun 2017
Crude oil hits seven-month low - Video Update
21 Jun 2017
Sell-off in crude weighs on equities - AM Briefing
21 Jun 2017
Crude falls back to November lows - PM Bulletin
20 Jun 2017
Fresh records for US indices - AM Briefing
20 Jun 2017
Equity rally resumes - AM Briefing
19 Jun 2017
Markets steady ahead of weekend - AM Briefing
16 Jun 2017
FOMC surprises with “hawkish rate hike” - Video Update
15 Jun 2017
Fed unveils “hawkish rate hike” - AM Briefing
15 Jun 2017
FOMC rate decision in focus - Video Update
14 Jun 2017
Investors expect another Fed rate hike - AM Briefing
14 Jun 2017
FOMC look-ahead - PM Bulletin
13 Jun 2017
NASDAQ futures recover in early trade - AM Briefing
13 Jun 2017
Equities slide after US tech sell-off - AM Briefing
12 Jun 2017
May-hem! Tories chuck away majority - AM Briefing
09 Jun 2017
Brief notes on gold - PM Bulletin
08 Jun 2017
Markets calm as investors take “Risky Thursday” in their stride
08 Jun 2017
Markets becalmed ahead of “Risky Thursday” - AM Briefing
07 Jun 2017
Sterling, events on Thursday and the UK election
06 Jun 2017
Safe havens in demand - AM Briefing
06 Jun 2017
Trading Guides - How CFD trading works
05 Jun 2017
Sterling steady after terror attack - AM Briefing
05 Jun 2017
Non-Farm Payrolls in focus - AM briefing
02 Jun 2017
Non-Farm Payroll look-ahead - Video Update
01 Jun 2017
Crude bounces after US inventory data - AM Briefing
01 Jun 2017
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Early moves

Fed says more tightening this year

Looks past inflation downturn

European equities turned sharply lower after a quiet start. Investors are busy working out the implications of last night’s comments from the Federal Reserve. The US central bank took investors by surprise, although you wouldn’t know it through looking at the close-out on US stock indices. The Dow hit a fresh all-time record high while the broader indices ended little-changed.

The US central bank raised rates by 25 basis points as expected. However, given the downturn in inflation since the beginning of the year and some uncertainty about the outlook for US economic growth, there was a general feeling that the Fed would deliver a “dovish rate hike.” That is, raise rates but downplay the likelihood of tighter monetary policy later in the year. This view gained additional traction following the release yesterday afternoon of a weaker-than-expected CPI inflation number and disappointing Retail Sales. However, the Fed insisted that it remains on target to tighten by another 25 basis points before the year-end, and also expects to begin the process of reducing its balance sheet.

Of course, the Fed is desperate to “normalise” monetary policy in preparation for the next inevitable economic downturn. At the same time the central bank is effectively saying that it has complete confidence in the US economy in that it expects inflation and growth to pick up from current levels. However, it looks as if an increasing number of market participants no longer share the Fed’s optimism and fear that tightening monetary policy further at this time may contribute to, or even trigger, the next recession.

Stock Index Update

Crude sell-off weighs on equities

But tech stocks stage a recovery

There was a firmer tone across European and US equities for most of yesterday’s session.  This followed on from Tuesday’s recovery on Wall Street which saw the Dow and S&P500 close out at fresh record highs. Investors took advantage of the recent sell-off in technology stocks to re-establish long positions in such favourites as Apple, Amazon, Alphabet, Facebook and Microsoft. However, while the tech sector was back in favour (although the NASDAQ has yet to recover lost ground from the heavy sell-off across Friday and Monday) the broader market fared less well. Eventually the major indices turned lower as the sell-off in crude oil gathered pace. Crude has been on the back foot ever since the OPEC meeting at the end of May when a number of producers failed to agree to deeper output cuts. The pull-back accelerated after a clutch of bigger-than-expected US inventory numbers which triggered stop driven selling.

Commodities Update

EIA confirms gasoline build

Gold and silver flip-flop on data/Fed

Crude oil spent all of yesterday trading in negative territory. This followed the release of the latest US inventory update from the American Petroleum Institute (API) on Tuesday night. This showed large and unexpected builds in crude and gasoline stockpiles. Crude inventories were up 2.75 million barrels on expectations of a 2.45 million barrel drawdown. Gasoline stockpiles rose 1.79 million barrels against an expected reduction of 1.15 million. The sell-off accelerated yesterday afternoon after the Energy Information Administration (EIA) released its own update on US inventories. Although this failed to confirm the build in crude stockpiles, the drawdown was smaller than expected. But crucially, gasoline stockpiles rose by over 2 million barrels. Traders rushed to cut their exposure to crude and it wasn’t long before sell stops were triggered which accelerated the decline. Both Brent and WTI fell to their lowest intra-day levels since early May.

Precious metals shot higher yesterday afternoon following the release of disappointing US economic data. Retail Sales (both core and headline) fell 0.3% month-on-month with both coming in significantly below their prior readings and market expectations. On top of this, headline CPI slipped 0.1% month-on-month - again well below expectations and last month’s number. The weak data convinced investors that even though the Fed would raise rates by 25 basis points at last night’s meeting, it was likely to put a dovish tone on its accompanying statement and hint that it may hold off from raising rates again at its September meeting. Previously, the Fed had suggested that it would raise rates by 75 basis points in 2017 as well as starting to reduce its $4.5 trillion balance sheet. But unfortunately the CPI and Retail Sales number completely wrong-footed investors. Not only did the Fed raise rates, but it reiterated its intention to hike again before year-end and start to reduce its balance sheet. The news saw gold and silver reverse earlier gains.

Forex Update

Dollar slumps on US economic data

But soars following Fed’s hawkish outlook

The dollar slumped yesterday afternoon following the latest update on US CPI inflation and Retail Sales. Headline CPI fell 0.1% against an expected month-on-month increase of 0.2%. Core CPI (excluding food and energy) also came in below expectations rising just 0.1% from the previous month. The news led to a sharp sell-off in the US dollar with the Dollar Index hitting its lowest level since November’s presidential election. The EURUSD surged higher and came close to breaking above 1.1300 again.

But there was a sharp turnaround later yesterday evening. The Fed hiked rates by 25 basis points, as expected. But investors were wrong-footed by recent weakness in US economic data. Most expected the Fed’s FOMC to put a dovish spin on its statement and Summary of Economic Projections. However, the Fed indicated that it is prepared to raise rates by another 25 basis points later this year and start to wind down its $4.5 trillion balance sheet. This took investors by surprise and they acted accordingly. However, it’s fair to say that there’s considerable scepticism over the Fed’s ability to raise rates further without a pick-up in inflation.

The BoE meeting concludes today and the Bank is expected to keep rates unchanged. This is not a major meeting as there will be no updated inflation report and Governor Carney will not be holding a press conference.

Upcoming events

Today’s significant events and economic data releases include rate decisions from the Bank of England and Swiss National Bank and Eurogroup meetings. From the US we have Weekly Jobless Claims, Import Prices, Empire State Manufacturing Index, Philly Fed Manufacturing Index, Capacity Utilisation, Industrial Production and TIC Long-Term Purchases.


Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.


Posted by David Morrison

Category: AM Bulletin

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