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Investors on edge after Wall Street sell-off
30 Jun 2017
Central bankers keep traders guessing - Video Update
29 Jun 2017
Markets mixed ahead of weekend - AM Briefing
23 Jun 2017
Investors concerned over oil sell-off - AM Briefing
22 Jun 2017
Crude oil hits seven-month low - Video Update
21 Jun 2017
Sell-off in crude weighs on equities - AM Briefing
21 Jun 2017
Crude falls back to November lows - PM Bulletin
20 Jun 2017
Fresh records for US indices - AM Briefing
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Equity rally resumes - AM Briefing
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FOMC surprises with “hawkish rate hike” - Video Update
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Fed unveils “hawkish rate hike” - AM Briefing
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FOMC rate decision in focus - Video Update
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Investors expect another Fed rate hike - AM Briefing
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FOMC look-ahead - PM Bulletin
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NASDAQ futures recover in early trade - AM Briefing
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Brief notes on gold - PM Bulletin
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Markets becalmed ahead of “Risky Thursday” - AM Briefing
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Sterling, events on Thursday and the UK election
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Early moves

European data disappoints

Fed is set to tighten monetary policy further

All the major European indices are weaker this morning. Investors were unimpressed by the latest updates on Manufacturing and Services PMIs from France, Germany and the Euro zone. French Manufacturing was a bright spot, but German Manufacturing slipped from the prior month while the country’s services sector was down sharply. The pull-back in equities was offset to some extent by a modest recovery in oil prices.

Precious metals also turned higher, helped along by a pull-back in the US dollar. On this score it’s worth considering what the Fed may be trying to achieve over the next twelve months or so. Bear in mind that it kept monetary conditions extraordinarily loose for around eight years and (excluding an isolated hike at the end of 2015) has only just embarked on its tightening programme. The Fed behaves like a giant oil tanker in that once it sets a course it tend to proceed steadily until it reaches its destination. It then takes time to turn before steadily heading back the way it has come. The Fed has finally turned away from loose monetary policy and will continue in its attempt to “normalise” rates until it achieves its target - unless it is thrown off course by an unexpected event. Consequently, given prior statements from senior Fed members, it seems unlikely that the central bank will continue to tighten until it gets fed funds above 3% and reduces its balance sheet by around $2 trillion. This could take a couple of years or so, assuming a smooth journey. Consequently, unless unemployment surges and/or inflation falls further and/or the stock market plunges, the Fed will continue to tighten monetary policy at a slow and steady rate. This will remove one of the pillars of support from under global equities.

Stock Index Update

US indices end mixed

European indices drift in early trade

Last night US stock indices had another lacklustre session. Once again the Dow and S&P500 posted modest losses while the NASDAQ ended in the black. Goldman Sachs weighed on the Dow as the banking sector lost ground ahead of the latest round of Fed stress tests. The results were revealed after the close and showed that all 34 of the largest US banks were capable of withstanding certain economic shocks.  Meanwhile the health care sector posted the biggest positive contribution yesterday, taking over from biotechnologies which helped lift the NASDAQ earlier in the week. Health care has been in the news this week as investors prepare for the unveiling of the Senate’s health care bill which has been designed to replace Obamacare. However, it is understood that some senior Republicans oppose the new bill saying it doesn’t resolve current issues.

Yesterday also brought other mixed session for European stock indices. There were modest gains for the German DAX and French CAC and small losses on the UK FTSE100 and Spanish IBEX. But all the major European indices were weaker first thing this morning. Investors were reacting to some mixed results from the latest Manufacturing and Services PMIs. On top of that, there’s still some concern over weakness in the oil price.

Commodities Update

Crude steadies on short-covering

Gold and silver recover

Crude oil rallied modestly in early trade yesterday and held these gains through to the close. There was no particular catalyst for the move and so far it looks like little more than some short sellers booking profits. It’s certainly too early to know if this marks the end of the month-long sell-off or if this is merely a period of consolidation before crude resumes its decline. As things stand both WTI and Brent appear oversold and so it wouldn’t take much in the way of good news to spark a bigger upward move and a wave of short-covering. However, it’s difficult to know where the positive news could come from. After all, the last OPEC meeting took place less than a month ago and it was abundantly clear then that there was no appetite for increasing the daily output cut beyond 1.8 million barrels. OPEC and non-OPEC members would need to call an emergency meeting if they were serious about addressing the current decline. But that looks unlikely to happen unless crude breaks below $40. Nevertheless, there’s always the danger of an unexpected geopolitical event igniting the oil price so short sellers should proceed with caution.

Both gold and silver spent most of yesterday’s session trading in positive territory. But as we’ve seen on numerous occasions recently the two metals pulled back from their best levels as the day wore on. Yesterday’s price action offered some encouragement to bullish traders who have had a torrid time of late. Gold and silver have fallen sharply this month having staged a recovery following a sharp sell-off in May. This has proved frustrating for those who expect precious metals to perform well on dollar weakness. The greenback has fallen sharply since the beginning of the year. Last week the Dollar Index hit its lowest level since the US presidential election back in November. However, a strong close tonight for gold in particular could offer some encouragement to buyers - assuming the dollar doesn’t manage to break out to the upside. That remains a possibility given the Fed’s recent hawkishness.

Forex Update

Japanese yen surrenders early gains

US dollar unable to build on last week’s bounce

There was relatively little movement across the major currency pairs yesterday. The Japanese yen was firmer in early trade which was an indication of a loss of risk appetite as traders responded to further weakness in crude oil. However, the yen gave back most of its gains against the majors and ended virtually unchanged versus the dollar. Traders reversed their positions as oil finally staged a modest recovery in what’s proving to be a torrid month for crude.

The euro was a touch weaker across the board and the dollar was mixed. The greenback bounced off the seven month lows hit just over a week ago. Back then the dollar slumped following the release of lower than expected CPI inflation data and Retail Sales. But it roared back to life later in that same session after the US Federal Reserve raised rates and said it was preparing to hike again and trim its balance sheet before the year-end. Nevertheless, the dollar’s gains appear to be capped for now, possibly because market participants are not convinced by the Fed’s hawkish rhetoric. Many commentators believe that if the recent weakness in US economic data continues then the central bank will delay monetary tightening. They may soon find out that the Fed is prepared to risk raising rates despite a slowdown in inflation as they desperately battle to normalise monetary conditions.

Upcoming events

Today’s significant events and economic data releases include French, German and Euro zone Flash Manufacturing and Services PMIs. We also have Canadian CPI. From the US we have Flash Manufacturing and Services PMIs, New Home Sales and a speech from Federal Reserve Governor Jerome Powell.

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. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. As a marketing communication it is not subject to any prohibition on dealing ahead of the dissemination of investment research, although Spread Co operates a conflict of interest policy to prevent the risk of material damage to our clients.”

 

Posted by David Morrison

Tagged: AM Bulletin

Category: AM Bulletin


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