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
29 Nov 2016
Mixed start for equities; crude lower - AM Briefing
29 Nov 2016
An introduction to technical analysis - Trading Guide
28 Nov 2016
Softer tone across risk assets - AM Briefing
28 Nov 2016
Crude, dollar and equities slip in holiday-shortened session
25 Nov 2016
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
21 Nov 2016
Dollar continues to surge - AM Bulletin
18 Nov 2016
Crude rebounds despite inventory rise - PM Bulletin
17 Nov 2016
Equity rally slows - AM Bulletin
17 Nov 2016
US dollar continues to rally - Video Update
16 Nov 2016
Dollar holds recent gains - AM Bulletin
16 Nov 2016
Dollar Index tests resistance - PM Bulletin
15 Nov 2016
Dollar soars as bonds slide - AM Bulletin
15 Nov 2016
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
09 Nov 2016
US Election – possible outcomes and market reaction - Video Update
08 Nov 2016
US election result is all that matters now - AM Bulletin
08 Nov 2016
What is day trading? - Trading Guides
07 Nov 2016
Election uncertainty spooks investors - Weekly Bulletin
07 Nov 2016
Market info update: US Election Market Changes
04 Nov 2016
US Non-Farm Payrolls in focus - AM Bulletin
04 Nov 2016
Non-Farm Payroll look-ahead - PM Bulletin
03 Nov 2016
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
01 Nov 2016
RBA and BOJ leave rates unchanged - AM Bulletin
01 Nov 2016
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Economic Outlook 

One of the most interesting features of last week’s trading was the stock market sector rotation that followed Donald Trump’s win. This became apparent on Thursday when the tech-heavy NASDAQ100 ended the session 1.6% lower while the “old school” Dow Jones Industrial Average finished up 1.2% and at a fresh all-time closing high (the S&P500 was effectively unchanged). The basic reason for the rotation was that Donald Trump’s policy proposals (for example, tariffs on imports and infrastructure spending) look likely to prove negative for tech companies and positive for industrials, oil companies and the like. But the overall takeaway for me is that the current stock market action is very misleading and the fresh record Dow high is not telling us the whole story.

For a start, last week’s move is not indicative of broad market strength. While the Dow may have smashed above the 18,600 resistance that has held since July, the S&P500 pulled back from its own resistance level around 2,180. Meanwhile, the NASDAQ100 is now more than 4% below the high hit towards the end of October. So what we have here is a narrow index of thirty of the world’s biggest corporations indicating a strength that isn’t reflected in the wider market. Also bear in mind that the Dow is price-weighted rather than market cap weighted (like the S&P and NASDAQ). This leads to disparities which can be misleading when comparing the price action across the indices. This is not to say that equities can’t go higher from here, only to say that the market needs to settle down and readjust following last week’s tumultuous events.

At the moment investors are shifting money around on the basis of Mr Trump’s campaign promises. Some of these patently ridiculous with no chance of happening - the Mexican Wall for instance. But many others are either over-the-top (the promise of $1 trillion in infrastructure spending for example) or sketchy and will have to be fine-tuned or toned down before they go before Congress. However, the prospect of rolling back Obamacare and Dodd-Frank Wall Street Reform Act is very real.

But it’s important to consider more immediate concerns. First up, there’s the Italian constitutional referendum on 4th December. There’s a very real danger that Prime Minister Matteo Renzi loses this vote and carries through his threat to resign. If he fails to carry the country his way, it opens up the possibility of further disquiet across Europe as people increasingly question the benefits of membership of the European Union.

Then we have the rate decision from the US Federal Reserve on 14th December. The expectation is that the Fed will raise interest rates for the first time in twelve months. This view was strengthened at the end of last week following a speech from Federal Reserve Vice-chairman Stanley Fischer. Mr Fischer said that the case for removing accommodation is "quite strong" and that the Fed is close to achieving its dual mandate. In addition he said he was optimistic that the effect of higher rates "will be manageable" abroad and that a stronger US economy should help other economies.

So, it looks as if the Fed is getting ready for yet another December rate hike. But the danger is we see a repeat of events from last year when a rate hike into a slowing economy (as measured by GDP) resulted in a sharp sell-off in risk assets.

This week’s major economic releases include:


CNY Industrial Production, Fixed Asset Investment, Retail Sales; JPY Revised Industrial Production; CHF PPI; EUR Industrial Production; GBP Retail Sales


AUD Monetary Policy Meeting Minutes; EUR German Prelim GDP, French Final CPI, Italian Prelim GDP, Euro zone Flash GDP, Trade Balance, ZEW Economic Sentiment, German ZEW Economic Sentiment; GBP CPI, RPI; USD Retail Sales, Empire State Manufacturing Index, Import Prices, Business Inventories


AUD Wage Price Index, New Motor Vehicle Sales; GBP Claimant Count Change, Average Earnings Index, Unemployment Rate; USD PPI, Capacity Utilization, Industrial Production, NAHB Housing Market Index, Crude Oil Inventories, TIC Long-Term Purchases


AUD Employment Change, Unemployment Rate; GBP Retail Sales; EUR CPI, ECB Monetary Policy Meeting Accounts; USD CPI, Building Permits, Philly Fed Manufacturing Index, Unemployment Claims, Housing Starts


EUR German PPI, Euro zone Current Account; CAD CPI; USD CB Leading Index

Equities Outlook

Earlier in the year there was much discussion around how the FANGs were responsible for most of the US equity market’s resilience. The FANGs are Facebook, Amazon, Netflix and Google (or Alphabet as we have to get used to calling them now). Interestingly, Apple wasn’t included in the list as it was a touch out of favour at the time. Back then, fund managers and investors had a heavy-weighting of these stocks in their portfolios. All were performing well and this went a long way to disguise weakness in the broader market.

Last week the FAANGs (including Apple) sold off sharply following Trump’s election victory. In fact, investors cut their exposure to tech stocks in general. At the same time there were big gains for many of the old guard multinationals. Thursday saw the biggest divergence with the Dow up sharply thanks to constituents such as 3M, Caterpillar, IBM, JP Morgan, Merck and Wal-Mart.

Financial stocks, energy, materials and industrials were all in favour. This is consistent with the understanding that Trump favours oil and fossil fuels over green energy and wants to boost fiscal stimulus through infrastructure spending. At the same time anything that could be hurt by a pick-up in inflation was being dumped. Investors were also mindful of how many Silicon Valley tech outfits have benefitted from favourable government treatment and having their products manufactured abroad. If Trump follows through on his tariff threat, companies such as Apple (whose products are either assembled or manufactured overseas) could see their profit margins evaporate. Investors also considered how the regulatory environment could change. Banks, pharmaceuticals and health care stocks rallied last week on the expectation of less regulation.

By the way, credit where credit’s due. In last week’s bulletin I highlighted the analysis carried out by Sam Stovall, chief investment strategist at CFRA. Just to recap, Mr Stovall said that looking at the data since the Second World War, if the S&P500 is lower at the end of October than at the end of July, there’s an 86% probability that the challenger party (in this case the Republicans under Donald Trump) would beat the incumbent party (the Democrats under Hillary Clinton). This year, the S&P500 fell 2.29% from the end of July to the end of October. So, congratulations Mr Stovall! You called it correctly when just about every other poll and pundit got it wrong.

Commodity/ FX Outlook


Crude oil, along with other so-called “risk assets” sold off early on Wednesday morning after Donald Trump clinched the US presidency.  The pull-back saw WTI test support around $43.50 but then bounce sharply. However, both WTI and Brent slumped again on Friday afternoon. Ultimately, oil traders seem far more concerned about the outlook for global supply and demand and the OPEC meeting later this month than with the Trump presidency.

On Friday OPEC reported that its output hit a fresh record in October of 33.64 million barrels per day (bpd). This was a touch below an estimate from the International Energy Agency (IEA) earlier in the week when it reported that OPEC’s output in October came in at 33.83 million bpd, driven by production recoveries by Iraq, Libya and Nigeria. Nevertheless, even OPEC’s lower figure is way above the 33.24 million bpd from the previous month.

At a meeting in Algeria back in September OPEC announced a plan to cut production. It said the aim was to reduce output by 240,000 to 740,000 bpd to take production down to between 32.5 and 33.0 million bpd. Judging from the cartel’s latest data daily production would have to be cut by around 640,000 barrels just to hit the higher end of its target. Using the IEA data suggests a minimum cut of 830,000 bpd. The trouble is that Iraq, Libya, Nigeria and Iran are all insisting they should be exempt from any cuts. The question then is which OPEC members will end up shouldering a reduction and the accompanying loss of income? The answer is most likely to be none. Saudi Arabia is the only country that could make a significant cut. However, the Kingdom is in trouble and struggling to cope with its high social welfare commitments with oil below $50. On top of this, if the effort to limit output to boost the oil price is going to be effective, it will need some kind of agreement from non-OPEC producers as well. This seems most unlikely.

But amid all these questions over future supply, the IEA predicts that demand growth is set to ease to 1.2 million bpd in 2016 after peaking at 1.8 million bpd in 2015. Given this, it is little wonder that crude is retesting the lower end of its three month range.


It’s been a difficult week for gold bulls. They were cheering loudly in the early hours of Wednesday as it became apparent that Donald Trump had clinched the presidency. Gold shot above $1,330 for a gain of 5% from Tuesday’s close as the dollar tanked and investors rushed for safe havens such as the yen, Swiss franc and precious metals. However, gold has since fallen sharply. The initial panic on the surprise Trump win passed indecently quickly. In just a few hours the dollar had roared back into positive territory and equity markets bounced. Suddenly, there was no reason to head for safe havens. Instead, investors reallocated capital in the basis of Trump’s campaign promises. Those promises included sweeping tax cuts and waves of fiscal stimulus in the form of infrastructure spending. As far as investors were concerned, this would signal the end of the low growth, low interest rate deflationary environment that has been evident for so long. This led to a sell-off in gold as many investors have been buying the yellow metal on the basis that zero/negative bond yields mean that there’s no lost opportunity cost in holding non-yielding assets. The thinking goes that Trump’s proposed tax cuts and fiscal stimulus will kick-start growth and boost inflation. Higher interest rates will follow lessening gold’s appeal. Meanwhile silver had held up relatively well as, along with base metals such as copper, aluminium and zinc, it benefitted from its role as an industrial metal. But on Friday afternoon both precious metals tanked. There was no obvious trigger for the sell-off other than a further pull-back in the Treasury bond futures market. But the selling saw both gold and silver slump below support around $1,240/50 and $18 respectively.

Nevertheless, it is worth considering what a low tax, high spending Trump administration would mean in reality. First off, one has to assume that these policies would pass through Congress. That’s by no means certain even with Republican majorities in both the Senate and House of Representatives. The problem is that these measures would cause the budget deficit and national debt to explode. That won’t be good for the dollar or the bond market. But it could be positive for gold, at least once investors wake up to reality.


There were big swings in FX markets last week. On Wednesday morning the US dollar plunged after it became apparent that Donald Trump was on course to win the presidency. But it recovered quickly following Mr Trump’s acceptance speech which was considered both gracious and unifying. The Dollar Index tested support around 96.00 during election night but went on to break above 99.00 the following day. Understandably, FX moves were dollar-driven. However, there were correspondingly large swings in dollar-denominated currency pairs with “safe-haven” currencies such as the Japanese yen and Swiss franc particularly affected.

The turnaround in the dollar came as investors reassessed the outlook for inflation in light of a Trump presidency. Investors expect to see wide-ranging tax cuts, both corporate and personal. During his campaign Mr Trump promised to slash and simplify the tax system for individuals and slash the corporate tax rate to 15% from 35%. He has also proposed a one-off tax break for US multinationals which would encourage them to repatriate the hundreds of billions of dollars in profits held overseas.

But perhaps the thing exciting investors most is the promise of fiscal stimulus in the form of infrastructure spending. This is what so many neo-Keynesian economists have been demanding for years now, arguing that austerity measures only compound the slowdown in economic activity since the financial crisis. But government spending will mean bigger budget deficits and even more national debt. So it could be that it is the US rather than Japan that is the first country to experiment with “helicopter money.” 

Meanwhile, investors are also looking ahead to next month’s Federal Reserve monetary policy meeting. Fed members have been particularly hawkish since their September meeting and have given out strong signals that they are preparing to raise rates before the year-end. At the end of last week Fed Vice-Chair Stanley Fischer said that the case for removing accommodation was "quite strong" and that the Fed is close to achieving its dual mandate. It’s worth remembering that the Fed has spent all this year signalling their readiness to hike rates and then ducking out at the last moment. But if they fail to hike in December they really will lose their last wisp of credibility and this is what the bond market is telling us. Last week the yield on the 10-year Treasury rose above 2.10% - its highest level since the beginning of this year. This could be a problem as investors have been piling into bonds at an increasing rate ever since the financial crisis of 2008/9. The last few years have seen yields globally drop to historically low levels. This has led a number of analysts to warn that the bond bull market which has now run for thirty five years may be coming to an end. Even if it isn’t, if yields continue to push much higher from here (meaning bond prices decline), there will be a large number of investors sitting on significant losses.

Upcoming events

The US is partially closed for Veterans’ Day. Despite this from the US we have Inflation Expectations and Consumer Sentiment. We also have a speech from the Fed Vice-Chair Stanley Fischer. He is due to speak about US monetary policy and the global economy at the 20th Annual Conference of the Central Bank of Chile in Santiago. 


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Posted by David Morrison

Category: Weekly Bulletin

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