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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

Strong Payrolls lead to equity gains

But lack of inflation remains a concern

It’s been a positive start to the week so far, at least as far as global equity markets are concerned. Last week’s wobbles seem a distant memory as traders have jumped back in to hoover up stocks following a better-than-expected US Non-Farm Payroll release on Friday. The strong jobs number appears to have convinced many players that the US economic recovery is back on track and perfectly capable of weathering continued monetary tightening from the Federal Reserve. This is despite yet more evidence (through tepid wage growth) that inflation is still heading further away from the Fed’s 2% target. Yet while some investors are not yet convinced that the US central bank is committed to further rate hikes, others are now looking to the ECB to follow suit. Monetary tightening is typically negative for equities as rising yields not only increase the costs of doing business but also increase the attractiveness of other investments. But traders seem happy to take advantage of a recent pull-back in stocks to load up once again. Now it’s all down to the second quarter earnings season to see whether that proves to be a clever move or not.

Stock Index Update

US indices surge on strong payrolls

European stocks play catch-up

Friday saw mixed results as far as European and US stock indices were concerned. The European majors began on the back foot following a sharp sell-off on Wall Street on Thursday night. Investors were also reluctant to take on further long-side exposure as crude oil came under sustained selling pressure. But the major indices bounced off their lows later in the session following the release of a better-than-expected Non-Farm Payroll (NFP) number. The June NFP recorded an increase of 222,000 jobs - comfortably above the 175,000 consensus forecast. On top of this, May’s number was revised up to 152,000 from 138,000.The news triggered a wave of buying in US stock index futures and this fed through to Europe to an extent. European indices were mixed by the close of Friday’s session as investors seemed wary of overreacting to one set of data.

There continues to be some doubt over the quality of jobs created over last few years as these have tended to be low paid and part-time in many cases. In addition, there’s been little improvement in Average Hourly Earnings and so this has had little effect in terms of lifting inflation. The US Federal Reserve has a PCE inflation target of 2% which it has yet to achieve. Despite this, the latest data is viewed as strengthening the Fed’s hand when it comes to further monetary tightening. This is generally a headwind for equities. However, Friday’s jobs numbers help to convince investors that the US economic recovery is continuing.

Commodities Update

Brent pulls back sharply from $50

No support for precious metals

Crude rallied at the beginning of last week but was unable to hang on to gains. Both WTI and Brent managed to retrace 50% of the post-OPEC meeting sell-off over the four weeks from the end of May. But both contracts fell back midweek as sellers came in to book profits. WTI failed to hold above $47 while Brent retreated sharply after a failed attempt to take out $50 per barrel. The sell-off began on Wednesday and came despite news of a dramatic drawdown in US inventories from both the American Petroleum Institute (API) and the US Energy Information Administration (EIA). In particular, the official number from the EIA 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 from the hub in Cushing, Oklahoma. Despite this, traders paid more attention to technical levels and to a report from OPEC showing that crude exports from the cartel rose for the second successive month in June. Crude came under further downside pressure after news of resurgence in US production and as it became apparent that Russia, the world’s biggest producer after Saudi Arabia, has no appetite for cutting output further.

Gold and silver fell sharply again at the end of last week with neither metal able to find support. On Friday gold crashed back below $1,220 following the release of a better-than-expected US Non-Farm Payroll release. The strong jobs number was seen as supporting the likelihood of further monetary tightening from the US Federal Reserve. In addition Average Hourly Earnings came in below expectations. This was effectively a “double whammy” for the two precious metals. Not only does the prospect of higher interest rates weigh on non-yielding commodities such as gold and silver as investors can find better returns elsewhere, but stagnant wage growth means tepid inflation. This is the worst environment for precious metals when rates are rising but inflation is falling. On top of this, investors were wary of taking on fresh long positions even at such beaten down levels. Early on Friday morning silver suffered a “flash crash” when it dropped 6% in the space of a minute. It subsequently recovered, but confidence has taken a knock. Both metals were sharply lower again in early trade this morning.

Forex Update

Dollar rallies after strong payroll release

But remains near lows for 2017

FX markets were quiet in early trade on Friday as investors waited for the latest Non-Farm Payroll release. The June number came in at 222,000 - comfortably above the 175,000 expected. May’s number was also revised up. The headline release saw investors switch back into “risk-on” mode as the numbers suggested that the US economy is strengthening. This in turn suggests that there’s no reason for the Federal Reserve to scale back its plans for additional monetary tightening. The Fed continues to forecast one more 25 basis point rate hike before the year-end together with making a start on reducing its $4.5 trillion balance sheet. As a result the dollar popped higher, the euro slipped while the two key safe haven currencies, the Japanese yen and the Swiss franc, sold off sharply.

But it’s worth noting that Average Hourly Earnings came in below expectations. This continues to suggest that there’s no imminent danger of wage growth pushing up inflation any time soon. It’s also worth noting that the dollar continues to trade near the lows last seen back in November - just ahead of Trump’s victory in the presidential election. The main reason for this is that there’s been a growing expectation that the ECB is getting closer to ending its €60 billion per month asset purchase programme. Last week saw the release of minutes from the last ECB meeting which were interpreted as being more hawkish than expected. Some members of 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 German Trade Balance, the Euro zone Sentix Investor Confidence survey and US Labour Market Conditions Index.


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Posted by David Morrison

Category: AM Bulletin

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