Incisive market commentary from David Morrison

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Collapse 2017 <span class='blogcount'>(348)</span>2017 (348)
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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
20 Jun 2017
Equity rally resumes - AM Briefing
19 Jun 2017
Markets steady ahead of weekend - AM Briefing
16 Jun 2017
FOMC surprises with “hawkish rate hike” - Video Update
15 Jun 2017
Fed unveils “hawkish rate hike” - AM Briefing
15 Jun 2017
FOMC rate decision in focus - Video Update
14 Jun 2017
Investors expect another Fed rate hike - AM Briefing
14 Jun 2017
FOMC look-ahead - PM Bulletin
13 Jun 2017
NASDAQ futures recover in early trade - AM Briefing
13 Jun 2017
Equities slide after US tech sell-off - AM Briefing
12 Jun 2017
May-hem! Tories chuck away majority - AM Briefing
09 Jun 2017
Brief notes on gold - PM Bulletin
08 Jun 2017
Markets calm as investors take “Risky Thursday” in their stride
08 Jun 2017
Markets becalmed ahead of “Risky Thursday” - AM Briefing
07 Jun 2017
Sterling, events on Thursday and the UK election
06 Jun 2017
Safe havens in demand - AM Briefing
06 Jun 2017
Trading Guides - How CFD trading works
05 Jun 2017
Sterling steady after terror attack - AM Briefing
05 Jun 2017
Non-Farm Payrolls in focus - AM briefing
02 Jun 2017
Non-Farm Payroll look-ahead - Video Update
01 Jun 2017
Crude bounces after US inventory data - AM Briefing
01 Jun 2017
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Early moves

European and US stock indices recover

Traders hoping for positive end to difficult week

Overall, it’s been a relatively quiet start to Friday’s trade. But the equity market bearishness which followed on from Wednesday’s hawkish Fed meeting appears to be abating. European and US stock indices are all firmer this morning while crude oil and precious metals have also steadied. FX pairs are little-moved although the Japanese yen is weaker, demonstrating a modest increase in investor risk appetite. A positive close across US indices tonight, particularly if this sees a recovery in the market leaders such as Apple, Amazon, Facebook and Alphabet (Google), will certainly help convince investors that the worst may be over. However, there can be no doubt that the Fed is determined to continue to withdraw liquidity and tighten monetary policy further this year. This means that a vital prop is being withdrawn from the equity market.

Stock Index Update

Equities fall on hawkish Fed

Start of a correction or buying opportunity?

There was a surprisingly muted initial stock market reaction to the Fed’s unexpected hawkishness in early trade yesterday. This was probably the result of the FOMC’s Summary of Economic Projections which was little-changed from the March report in terms of members’ forecasts for future growth, employment and inflation. However, soon after yesterday’s open investors were beginning to rethink the outlook for European and US equities given that the Fed said it was prepared to raise rates again before the year-end and start to reduce its $4.5 trillion balance sheet. This wouldn’t be too much of a problem if the data showed unequivocally that US growth was picking up along with inflation. Unfortunately there are big question marks over both. Consequently the overriding concern (for now) is that the Fed is making a policy error by tightening monetary conditions just as the economy is showing signs of faltering.

Now it could be that yesterday’s sell-off merely turns into another buying opportunity. But investors will now want to see all the major indices recover swiftly to make new highs before feeling less concerned that a more serious correction is imminent. Tonight’s close should be very instructive.

Commodities Update

Crude’s slide continues

Precious metals remain under pressure

Crude oil fell again yesterday, although not yet by enough to entice in serious buyers. Thursday’s fall was a continuation of the sell-off which began soon after the OPEC meeting at the end of May. While OPEC and non-OPEC producers agreed to extend output cuts by nine months, there was widespread disappointment that these cuts weren’t deepened beyond 1.8 million barrels per day (bpd). Also weighing on prices is increased US production which has jumped more than 10 percent since mid-2016 and is currently estimated to be over 9.3 million bpd. Some analysts now predict that production will hit 10 million bpd by year-end. On top of this US exports are expected to average 1 million bpd over 2017. This effectively offsets OPEC’s contribution to the 1.8 million bpd output cut agreed last November. Earlier this week the latest US inventory updates from the American Petroleum Institute (API) and Energy Information Administration (EIA) showed bigger-than-expected builds in crude stockpiles with the EIA also reporting large increases in gasoline and distillate inventories as well.

Gold and silver fell again yesterday reversing a sharp rally on Wednesday afternoon. Both precious metals have struggled to find support having fallen for over a week now. However, both surged higher midweek following the release of a poor US Retail Sales number and on further evidence that inflation was failing to take hold in the US economy. The weak data saw the dollar slump while gold and silver soared on raised hopes of a dovish Federal Reserve meeting. While a 25 basis point rate hike was expected, investors believed the Fed would dial back its plans for further tightening following a recent run of disappointing US economic data. But instead the US central bank reiterated its forecast for an additional hike before the year-end together with a plan to reduce its balance sheet. The news caught traders off guard and buyers of gold and silver quickly cut their positions. It remains to be seen if the two precious metals can now find support.

Forex Update

Dollar surges on hawkish Fed

Sterling bounces after MPC rate vote

The US dollar flew higher yesterday. This followed Wednesday’s session when it plummeted to a seven month low after data showed a plunge in Retail Sales and another decline in CPI inflation. Traders were completely wrong-footed as they expected a “dovish rate hike” from the Fed. Instead the US central bank indicated it was prepared to hike rates again before the year-end and also begin to reduce its balance sheet. This unexpected hawkishness led to the dollar rally.

Sterling had a bit of a rollercoaster trading session yesterday. It slipped early on following the release of some disappointing economic data. Retail Sales fell 1.2% from April to May which was well below the 0.9% decline anticipated and last month’s +2.5% number. But the British pound subsequently rallied as the Bank of England’s Monetary Policy Committee (MPC) announced its latest rate decision. The official Bank Rate was held at 0.25% as expected. However, there were three MPC members who voted for an immediate increase in rates. This was up from one last month and completely unexpected as Saunders and McCafferty joined Forbes in calling for a rate increase on the back of the recent pick-up in inflation along with the continued growth in employment. Earlier this week we heard that CPI inflation hit 2.9% in May - well above the Bank’s 2% target rate.

Upcoming events

Today’s significant events and economic data releases include ECOFIN meetings, Euro zone CPI and the Bank of England’s Quarterly Bulletin. From the US we have Building Permits, Housing Starts, Consumer Sentiment and Inflation Expectations.


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Posted by David Morrison

Category: AM Bulletin

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