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 Wednesday 12 October 2016

FOMC minutes in focus - AM Bulletin

 

 

Indices Update

It has been a mixed start for European equities this morning following a weaker close on Wall Street last night. US stocks fell sharply after Alcoa’s third quarter earnings disappointed, as crude oil dipped and on fears that the Democrats could make significant gains in Congress. Donald Trump’s campaign is now seen as unravelling with a serious split happening amongst the Republican Party. The worry is not so much that Hillary Clinton will win the election (which simply maintains the status quo) but that the public’s dislike of Trump will translate into a significant loss of Republicans in both the Senate and House of Representatives. If so, this could pave the way for Clinton-led legislation which could prove to be less than business-friendly in certain areas.

Yesterday Samsung ended production of its Galaxy Note 7 smartphones.  The South Korean company stopped production of the large-screen smartphone as exploding batteries had become a recurring global problem. The decision came just one day after it halted global sales of the device.  Samsung shares fell 9% yesterday, wiping out around $20 billion of market value. Samsung launched the Note 7 in August but a spate of battery fires led to a recall. However, the replacement devices have also been found to be at fault.

Deutsche Bank continues to cut back the size of its derivatives book. The bank’s Chief Risk Officer Stuart Lewis told Welt am Sonntag that its derivatives book wasn’t as risky as it appears: "The €46 trillion figure sounds gigantic... but reflects only the notional value of the contracts, while the bank's net exposure to derivatives is far lower, at around €41 billion.” However it is worth noting that even if this is the case, it is still considerably larger than Deutsche’s market cap which is currently around €17 billion.

The FTSE 100 ended the day 26.6 points lower at 7,070.9

The German DAX fell 46.9 points or 0.4% to end the day at 10,577.2

The US30 closed 200 points lower to finish at 18,128.7. The S&P 500 ended down 1.2 % at 2,136.7 while the Nasdaq 100 fell 1.5% to close at 4,821.9

Equities

Alcoa (AA) unofficially marked the start of the third quarter earnings season when it released its results. In a break from tradition, the announcement came ahead of yesterday’s US open rather than after the close on Monday night. The aluminium giant reported earnings of $0.32 per share on revenues of $5.21 billion. This was against expectations of $0.35 and $5.31 billion respectively. Alcoa ended the day 11.4% lower at $27.91

Commodities Update

Crude had mixed fortunes yesterday. Both WTI and Brent pulled back from their best levels in early trade but then rallied into positive territory later in the afternoon. However, the two contracts once again turned lower ahead of the European close as doubts were voiced at how successful any efforts by OPEC to cut production would prove to be. Not only do many analysts doubt that OPEC members will be able to agree to cuts, but they also question the likelihood that the organisation can ensure compliance. On top of this, yesterday OPEC reported that its September oil production rose to 33.6 million barrels per day. This was a fresh record and will make it much harder for OPEC to reduce its proposed production target to 32.5 – 33.0 million barrels per day.

Yesterday Russian President Vladimir Putin said his country supported OPEC’s decision to take action to boost oil prices. He hoped that the cartel would be able to agree to limit production at its meeting at the end of November. He also said that Russia was willing to consider a freeze if not an outright production cut. However, later on Igor Sechin, head of Rosneft and widely understood to be Russia's most influential oil executive said his company would neither freeze  nor cut oil production as part of a possible agreement with OPEC. Not only did Mr Sechin’s comments appear to contradict those of his boss, but were also at odds with pro-OPEC sentiments from Russia’s Energy Minister Alexander Novak. However, it seems unlikely that this contradiction cropped up by accident. More likely Russia wants to keep the market guessing over its true intentions. Russia is currently the world’s largest energy exporter and is on course to pump a post-Soviet record amount of oil this month.

Gold and silver began yesterday by building on Monday’s gains. However, both metals drifted lower in the European session although their losses were modest. Once again, dollar strength made it difficult for the two precious metals to stay in positive territory. The dollar is getting a lift as investors recalibrate the likelihood of a Fed rate hike ahead of the year-end. Yesterday Chicago Fed President Charles Evans said policy “may well be changing soon,” even as he argued for keeping interest rates low until core inflation moves higher. Investors are now looking ahead to tonight’s release of FOMC minutes of the Fed’s September meeting.

Support for gold continues to build in a band between $1,240 and $1,250. It could be that this becomes a base for a pick-up in prices following last week’s shock sell-off. Gold has to break above $1,280 which is roughly where its 200-day moving average comes in. If it can manage that, the next level of resistance comes in around $1,300. In today’s early trade both gold and silver have again managed to tack on modest gains. However, unless there is a significant pull-back in the dollar it feels as if both metals are set to move sideways for now, rather than making back last week’s losses.

Forex Update

Once again sterling was yesterday’s biggest mover in FX. Cable fell in early trade and the selling continued into the afternoon session. The GBPUSD came within a few ticks of 1.2100 just ahead of the official US close yesterday and hitting a fresh 31-year closing low. However, sterling has managed to stabilise since then thanks to what looks like a short-covering bounce which carried on through to the Asian Pacific session. There’s been a bit of a drift since then, so it may be too early to assume the worst is over for the British pound.

Back in February 1985 the GBPUSD briefly traded below 1.0500. This was a precipitous fall from where it stood at the beginning of 1981 – just above 2.4000. As sterling hit its low-point the miners’ strike was drawing to an end and the first episode of “EastEnders” hit our screens. The decline in cable back then was as much about the positive turnaround in the US economy (and Fed President Paul Volker’s battle with inflation) as a downturn in the UK’s.

As in the early eighties dollar strength is partly to blame for sterling’s weakness today. The US Federal Reserve is threatening to hike rates while the Bank of England said it is prepared 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.

Meanwhile, the dollar got another boost after Chicago Fed President Charles Evans said policy “may well be changing soon,” even as he argued for keeping interest rates low until core inflation moves higher. Investors are now looking ahead to tonight’s release of FOMC minutes of the Fed’s September meeting.

Upcoming events

Today’s significant economic events include the Swiss ZEW Economic Expectations survey, Euro zone Industrial Production and a speech by Bank of England MPC member Jon Cunliffe. From the US we have minutes from the Fed’s September FOMC meeting, JOLTS Job Openings, the Federal Budget balance and speeches from FOMC-voting members Bill Dudley and Esther George. 

Disclaimer:

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

Tagged: AM Bulletin

Category: AM Bulletin


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