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
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Mixed start for equities; crude lower - AM Briefing
29 Nov 2016
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Softer tone across risk assets - AM Briefing
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Crude, dollar and equities slip in holiday-shortened session
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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
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Dollar continues to surge - AM Bulletin
18 Nov 2016
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Equity rally slows - AM Bulletin
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US dollar continues to rally - Video Update
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Dollar Index tests resistance - PM Bulletin
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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
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US Election – possible outcomes and market reaction - Video Update
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US election result is all that matters now - AM Bulletin
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Election uncertainty spooks investors - Weekly Bulletin
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Market info update: US Election Market Changes
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04 Nov 2016
Non-Farm Payroll look-ahead - PM Bulletin
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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
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RBA and BOJ leave rates unchanged - AM Bulletin
01 Nov 2016
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 Wednesday 02 November 2016

FOMC rate decision ahead - AM Bulletin



Indices Update

European equities and US stock index futures are weaker this morning after closing sharply lower yesterday. The major Asian Pacific indices also fell in the overnight session. The sell-off comes on the back of dollar weakness following the latest polling on the US presidential election. Yesterday saw the release of the first poll conducted after the FBI’s announcement that it was reopening its investigation into emails connected to Hillary Clinton’s private server. The ABC/Washington Post poll showed that Trump had established his first lead over Clinton since May. While Trump’s lead is less than 1%, the same poll showed a 13 point lead for Clinton just one week ago.

The US Federal Reserve concludes its two-day meeting this evening and will release its statement and rate decision at 18:00 GMT. According to the latest calculations using the CME’s FedWatch Tool, the probability of a hike today stands at just 7%. Meanwhile the likelihood of a December rate increase now stands at 73% - down from 78% on Monday. The slight drop in probability suggests that investors are beginning to price in the possibility of a Trump win next week. The Fed may  be less anxious to tighten monetary policy in December if a surprise victory for Trump leads to excessive market volatility.

Early this afternoon we’ll see the latest update on the ADP Non-Farm Employment Change. This is expected to show an increase in October of 166,000 jobs. The release precedes Friday’s headline Non-Farm Payrolls. Generally, there is little correlation between the two data sets. However, the ADP number tends to be the less volatile of the two. Consequently, if the ADP number deviates significantly from the consensus expectation, it can often give investors the “heads-up” as to whether they can expect a good or bad number from Friday’s Non-Farms.

The FTSE 100 index closed down 37.1 points, or 0.5%, at 6,917.1

The German DAX fell 138.9 points or 1.3% to end the day at 10,526.2

The US30 closed down 105.3 points to finish at 18,037.1. The S&P 500 ended 0.7% lower at 2,111.7 while the Nasdaq 100 ended down 0.7% at 4,766.9


Yesterday brought the latest quarterly earnings updates from BP (BP) and Royal Dutch Shell (RDSB). BP reported third quarter profit (on an underlying replacement cost basis) of $933 million. This was up from the $720 million in the preceding quarter but represented a 49% slump when compared to the same period last year and was also below expectations. This was the ninth consecutive quarter of year-on-year declining profits and BP blamed the weak oil price, tighter margins and a number of one-off and non-cash items.

Meanwhile Royal Dutch Shell posted earnings on a current cost of supplies basis of $2.79 billion. This was well above the consensus expectation of $1.76 billion and 18% higher than the same period last year.

The two oil giants warned investors against expecting a sharp rebound in crude prices next year. Both expect the price of crude to average out in the low $50s in 2017. The two companies plan sharp cuts in capital spending to adapt to the expectations of “lower for longer” market conditions. BP ended the day 4.5% lower at 462 pence while RDSB closed 3.97% higher at 2,199 pence.

Commodities Update

Last night the American Petroleum Institute (API) released its latest update on US crude oil inventories for the week ending 28th October. Crude stockpiles rose by 9.3 million barrels - way above the 1.5 million expected and the largest inventory since March. There were drawdowns in both gasoline and distillates but these did little to offset the bearish effect of the crude build. In early trade this morning both contracts have fallen a further 1%.

Later today the Energy Information Administration (EIA) will release its own update. Last week these reports contradicted each other when the API showed a bigger-than-expected build which resulted in a sharp sell-off. Then the EIA data registered drawdowns in crude, gasoline and distillate stockpiles. Oil bounced back on the EIA report. However, the rally was short-lived as it came amid a general pull-back in crude prices. Both WTI and Brent struggled to make further gains after failing to break and hold above their June highs despite a rally which began in late September. This rally followed the surprise announcement following the International Energy Forum meeting in Algeria when OPEC said its members were ready to agree to production cuts. In the lead-up to the meeting it looked as if OPEC couldn’t even get agreement on an output freeze.

The current pull-back seems largely technical. However, there invariably has to be a trigger for directional change in the oil market. This came as investors reassessed the likelihood of output cuts being agreed at the OPEC meeting at the end of this month. Over the weekend non-OPEC oil producers appeared unwilling to join OPEC in limiting oil output levels to support prices. OPEC members themselves seem unable to agree on how to implement a deal to limit production. There are still questions over the likelihood of exemptions being extended to Iran, Nigeria and Libya as all three countries have been unable to maximise production due to previous sanctions (in the case of Iran) and because of hostilities in Nigeria and Libya. Iraq has also insisted that it should be exempt from any OPEC cuts due to its ongoing war with Islamic militants.

Gold and silver moved sharply higher yesterday.  Silver’s gains were particularly notable as the metal tacked on over 2.5% at one stage. The catalyst for the moves seemed to be the pull-back in the US dollar. The greenback had rallied hard throughout October as a succession of polls suggested that Hillary Clinton had an unassailable lead over Donald Trump in the race for the US presidency. A Clinton win is widely viewed as a continuation of the status quo and therefore more likely to provide the US Federal Reserve with the right conditions to raise rates in December.

However, the dollar fell sharply on Friday night after FBI Director John Comey said he had reopened an investigation into Hillary Clinton's use of a private email system. The dollar then steadied on Monday and it looked as if Friday’s fall was little more than a knee-jerk response to the FBI announcement and some follow-through profit-taking. However, yesterday’s sell-off appeared more substantial and followed the release of the first poll to fully take into account the FBI’s decision to look again at Clinton’s use of a private email server while she was Secretary of State. The ABC/Washington Post poll showed that Trump has taken a small lead (less than 1%) over Clinton. However, what has really rattled investors is that this poll gave Clinton a 13 point lead just one week ago.

Gold spent most of yesterday’s session trading above $1,280. However, it still has some way to go to recover its savage losses from a month ago. At the beginning of October gold slumped below support around $1,300 as the dollar rallied on the prospects of a Clinton win. Silver also has some catching up to do to make back its losses from then. However, yesterday it surged through old support around $18 and is on course to test resistance (previously support) around $18.50.

Forex Update

Yesterday the US dollar renewed a sell-off which began at the end of last week. The initial pull-back came late on Friday. This followed FBI Director James Comey announcing that an investigation into Mrs Clinton’s use of a private server for emails while Secretary of State was being reopened. The news was seen as dollar-negative as a Clinton win in next week’s election is viewed as less disruptive for the financial markets than a Trump one as it represents “business as usual.” The dollar steadied on Monday but then dipped sharply yesterday following the release of the first poll conducted after the news of the fresh FBI investigation was announced. The ABC/Washington Post poll showed that Trump had taken a small lead (less than 1%) over Clinton. However, what has really rattled investors is that this poll gave Clinton a 13 point lead just one week ago.

The Fed concludes its two-day monetary policy meeting this evening. The CME’s FedWatch Tool calculates just a 7% probability of a rate hike today from the US central bank. In contrast, real money trades on the fed funds futures (used by the CME to calculate these probabilities) yesterday assigned a 73.6% probability of a December hike. This was down a touch from Monday’s 78% reading which reflects how traders have factored in an increased chance of Trump winning the presidency next week. This makes sense as a Trump win hasn’t been priced in to financial markets. Consequently, there is likely to be some disruption following a victory for Trump which could persuade the Fed to delay a rate hike until next year. So there is very little chance of a Fed rate hike tonight. However, analysts will closely study the accompanying statement for any further clues concerning a move before the year-end. Then on Friday all eyes will be on the latest US Non-Farm Payroll update.

Upcoming events

Today’s significant economic events include the release of Manufacturing PMIs from Spain, Italy, France, Germany and the Euro zone. We also have the UK’s Construction PMI. From the US we have the ADP Non-Farm Employment Change, Crude Oil Inventories and the Fed’s rate decision and statement. 


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Posted by David Morrison

Category: AM Bulletin

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