Incisive market commentary from David Morrison

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Using the RSI in FX - Trading Guide
31 Jul 2017
HSBC share buy-back helps lift indices - AM Briefing
31 Jul 2017
Amazon triggers tech tumble - AM Briefing
28 Jul 2017
Fed reinforces dovish credentials - Video Update
27 Jul 2017
Facebook results boost NASDAQ - AM Briefing
27 Jul 2017
Crude breaks above resistance - PM Bulletin
26 Jul 2017
Equities rally on positive earnings - AM Briefing
26 Jul 2017
Look-ahead to tomorrow’s rate decision from the Fed
25 Jul 2017
Alphabet/Google falls 3% in after-hours trade
25 Jul 2017
Equities start the week on back-foot - AM Briefing
24 Jul 2017
Euro surges on “hawkish” comments from Draghi - AM Briefing
21 Jul 2017
Equities firmer ahead of ECB meeting - AM Briefing
20 Jul 2017
Europe firmer after late US rally - AM Briefing
19 Jul 2017
US Fed turns dovish - PM Bulletin
18 Jul 2017
Dollar slumps on US healthcare gridlock - AM Briefing
18 Jul 2017
Wall Street leads equity rally - AM Briefing
17 Jul 2017
US bank earnings in focus - AM Briefing
14 Jul 2017
Yellen flip-flops to reassure investors - AM Briefing
13 Jul 2017
Oil rallies, but volatility high - Video Update
12 Jul 2017
Yellen to testify in Washington - AM Briefing
12 Jul 2017
A look-ahead to Janet Yellen’s testimony - PM Bulletin
11 Jul 2017
Second quarter earnings in focus - AM Briefing
11 Jul 2017
Jobs data boost sentiment ahead of earnings - AM Briefing
10 Jul 2017
Investors nervous; Non-Farm Payrolls in focus - AM Briefing
07 Jul 2017
Non-Farm Payroll look-ahead - Video Update
06 Jul 2017
Investors shrug off FOMC minutes - AM Briefing
06 Jul 2017
Investors shrug off FOMC minutes - AM Briefing
06 Jul 2017
Look-ahead to FOMC minutes - Video Update
05 Jul 2017
Markets quiet and waiting for fresh guidance from US - AM Briefing
05 Jul 2017
Crude continues to push higher - PM Bulletin
04 Jul 2017
Dow closes at fresh record high - AM Briefing
04 Jul 2017
Positive start to second half of 2017 - AM Briefing
03 Jul 2017
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Early moves

Equities under pressure

Silver “flash crashes”

European stock indices headed lower soon after the open as traders responded to last night’s sell-off on Wall Street. Crude oil failed to hold onto gains made following yesterday’s massive build in US inventories. Both WTI and Brent turned sharply lower yesterday evening and are down again this morning, possibly signalling that we’ve seen the best of the recovery in oil prices for now.

Silver flash-crashed overnight when it dropped around 6% on the Japanese open.  Priced snapped back quickly but it’s still unclear what happened. It appears someone dumped $450 million worth of silver futures into the thin Asian Pacific market. But whether this was by design or an error is unknown.

Now focus turns to this afternoon’s US Non-Farm Payroll release. The consensus expectation is for a gain of 175, 000 jobs in June. This would be a significant improvement from last month when just 138,000 jobs were created on expectations of 180,000. In addition, the two prior readings were revised down.  Nevertheless, the six month average comes in at over 177,000 and this would need to drop towards 100,000 for markets to worry. But there’s some doubt over the quality of jobs created over last few years which have tended to be low paid and part-time in many cases.

The Unemployment Rate is expected to come in unchanged at 4.3% - its lowest level since April 2001. But again there’s the caveat of a low participation rate. Many would-be job seekers have given up looking for work for a variety of reasons and this means they don’t count as unemployed.

Meanwhile, there’s been little improvement in Average Hourly Earnings and so this has had little effect in terms of lifting inflation.

There are already some signs that investors are looking to reduce their overall exposure to equities. The last few weeks has seen a modest rotation out of US tech outperformers and into banking and other sectors which lagged over the first half of the year. But Wednesday’s FOMC minutes confirmed that some Fed members are concerned about high equity prices, particularly in this low volatility environment. Bond yields have spiked higher as investors are coming to believe that the ECB is close to tightening monetary policy. If investors take all this as a signal to reduce their holdings across the board then we could be in for a difficult summer.

Stock Index Update

US indices end sharply lower

Investors trim back long-side exposure

All the US majors closed sharply lower yesterday. The sell-off was initially driven by tech stocks once again, but by the end of the session there were few sectors which were unaffected. Investors were rattled by rising bond yields as the ECB released a hawkish set of minutes. But there were also concerns after a late sell-off in crude oil.

Also yesterday brought the releases of ADP Payrolls for June. These showed an increase of 158,000 which was well below the 184,000 expected. However, many traders were wrong-footed by last month’s strong ADP number as they expected it to foreshadow a good Non-Farm Payroll print which subsequently came in well below expectations. Consequently, market participants were wary of overreacting to the data. But the sell-off in equities accelerated soon after the open and once again tech stocks led to move lower. Unfortunately, there was little evidence of the sector rotation that we’ve seen recently. Instead, all the major US indices took losses.

European stock indices were little-changed first thing yesterday although there was a slight upside bias to prices. But US stock index futures sold off in early trade as they absorbed details from the minutes of the last FOMC meeting back in June. The minutes did little to clarify the FOMC’s thinking over when to start balance sheet reduction. But everyone appears to agree to continue gradual interest rate rises. However, it was notable that some members are worried about subdued volatility in equity markets particularly as this could increase the risks to stability. Also, a few FOMC members echoed Fed Chair Janet Yellen’s comment last week when she noted that equity prices were high when judged against standard valuation measures.

Commodities Update

Crude’s rally fizzles

Silver in overnight “flash-crash”

Crude prices were firmer in early trade yesterday, bouncing back strongly thanks to Wednesday night’s US inventory update from the American Petroleum Institute (API). This showed extremely large drawdowns in crude and gasoline stockpiles. Yesterday afternoon the US Energy Information Administration (EIA) released the official inventory numbers from the Department of Energy. These showed a massive 6.3 million barrel drawdown in crude (against 2 million decrease expected) along with bigger-than-anticipated reductions for gasoline, distillates and Cushing. The news saw crude prices surge again, although WTI still hasn’t recaptured the key $47 level. But early yesterday evening prices subsequently reversed again. There’s now a feeling that traders have seen the best of the recovery as even positive news seems unable to lift prices for long.

Crude oil fell sharply on Wednesday, ahead of the API release. Traders rushed to cover their long positions after OPEC reported that crude exports from the cartel rose for the second successive month in June. This came despite the OPEC/non-OPEC agreement to cut output by 1.8 million barrels per day, of which OPEC members are responsible for cutting 1.2 million barrels. The sell-off in oil came just as WTI had retraced 50% of its post OPEC meeting slump which began at the end of May and only ended after crude had fallen around 20%.

Silver flash-crashed overnight when it dropped around 6% on the Japanese open.  Priced snapped back quickly but it’s still unclear what happened. It appears someone dumped $450 million worth of silver futures into the thin Asian Pacific market. But whether this was by design or an error is unknown.

Gold and silver fell again yesterday. Gold gave back all of Wednesday’s gains and more although it managed to hold above $1,220 - a level which acted as support back in May and as resistance in January. Once again, silver fell below $16 per ounce and still looks as if it could retest December’s lows around $15.60. Investors continue to shun both metals despite a modest pull-back in the US dollar and the sell-off in equities. Both of these factors are usually supportive of gold. The cheaper dollar makes dollar-denominated commodities cheaper for non-dollar holders to buy, and gold is traditionally an offset for dollar investors. On top of that both gold and silver are safe-haven plays. However, both are out of favour currently as investors increasingly turn to cryptocurrencies instead.

Forex Update

Euro higher after hawkish ECB minutes

FOMC minutes offer little guidance

FX markets were little-changed first thing yesterday. The dollar fell than rallied then fell again following the release of the minutes from the June FOMC meeting on Wednesday night. But overall the minutes gave no fresh guidance over when the FOMC may begin reducing its balance sheet. Nevertheless, all the FOMC members appear to agree to continue to a gradual tightening of monetary policy. But it was notable that some members worried about subdued market volatility increasing the risks to stability. Also, there was this mention that, in the assessment of a few participants: “equity prices were high when judged against standard valuation measures."

Although FX got off to a quiet start yesterday it wasn’t long before we saw some movement. The euro began to rally mid-morning as bond yields picked up after the release of minutes from the last ECB meeting. These showed that some on the Governing Council considered abandoning a pledge to increase their bond purchase programme, due to an improved economic outlook.

Upcoming events

Today’s significant events and economic data releases include UK Manufacturing Production, Goods Trade Balance, Construction Output and Industrial Production. From the US we have Non-Farm Payrolls, the Unemployment Rate and Average Hourly Earnings. We also have G20 meetings where Bank of England Governor Carney will be gassing on about the economic impact of climate change.


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Posted by David Morrison

Category: AM Bulletin

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