Incisive market commentary from David Morrison

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Collapse 2017 <span class='blogcount'>(348)</span>2017 (348)
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Bounce in oil helps to steady equities - AM Briefing
30 Mar 2017
US stock indices consolidate - Video Update
29 Mar 2017
Risk appetite returns - AM Briefing
29 Mar 2017
S&P500 - Topping out, or consolidating? PM Bulletin
28 Mar 2017
Risk appetite returns after the Trump wobble - AM Briefing
28 Mar 2017
Beware hidden relationships between seemingly unrelated markets - Trading Guides
27 Mar 2017
Risk assets slump in wake of Trump’s healthcare debacle - AM Briefing
27 Mar 2017
Congress vote puts markets on hold - AM Briefing
24 Mar 2017
Markets on hold ahead of crucial vote - Video Update
23 Mar 2017
Tranquil markets await big data - AM Briefing
23 Mar 2017
Investors rattled after equity sell-off - Video Update
22 Mar 2017
US Markets Snap 109-Day Streak - AM Briefing
22 Mar 2017
Crude oil update - PM Bulletin
21 Mar 2017
European markets stable on the open - AM Briefing
21 Mar 2017
Dollar slips after G20 communique - AM Briefing
20 Mar 2017
FOMC post-mortem - Video Update
16 Mar 2017
Rate hike sends stocks higher - AM Briefing
16 Mar 2017
FOMC rate decision and Dutch election in focus - Video Update
15 Mar 2017
Oil rally gives markets lift - AM Briefing
15 Mar 2017
Crude trades at lowest levels since production cut agreement - PM Bulletin
14 Mar 2017
Politicians take centre stage again - AM Briefing
14 Mar 2017
Trading Psychology: Risk Management - Trading Guides
13 Mar 2017
Article 50 deadline approaches - AM Briefing
13 Mar 2017
European stocks push higher after Draghi’s hawkish stance - AM Bulletin
10 Mar 2017
Non-Farm Payroll look-ahead - PM Bulletin
09 Mar 2017
Fed rate hike seems certain - AM Briefing
09 Mar 2017
Market expects Fed to hike rates next week - Video Update
08 Mar 2017
Another twist in the French election - AM Briefing
08 Mar 2017
Odds slashed on Fed rate hike - PM Bulletin
07 Mar 2017
Investors lacking direction this morning - AM Briefing
07 Mar 2017
Fibonacci Retracement - extensions - Trading Guides
06 Mar 2017
Equities slip in early Monday trade - AM Briefing
06 Mar 2017
Modest profit-taking sees US indices post rare loss - AM Briefing
03 Mar 2017
Crude struggles to break above resistance - Video Update
02 Mar 2017
UK baffled by the origins of their favourite brands - PM Bulletin
02 Mar 2017
Fresh record highs for major indices - AM Briefing
02 Mar 2017
All eyes turn to the Fed - Video Update
01 Mar 2017
Markets react positively to Trump speech - AM Briefing
01 Mar 2017
Expand February <span class='blogcount'>(36)</span>February (36)
Expand January <span class='blogcount'>(39)</span>January (39)
Expand 2016 <span class='blogcount'>(483)</span>2016 (483)


Early moves

Wall Street closes lower

Fed’s Yellen and Fischer speak later

It’s been a long time coming but yesterday finally saw some profit-taking across US equity markets. Yet the pull-back has been modest so far with the Dow, S&P and NASDAQ only giving back between 0.5% and 0.7% across the three major indices. To put that in perspective these indices were up around three times as much on Wednesday following Trump’s bullish speech to Congress and on relief that the Fed look set to take a step nearer to normalising interest rates at this month’s meeting.

Yesterday’s sell-off has brought a mixed open for European indices this morning. The FTSE and DAX are down most although there were modest gains for the Italian FTSE/MIB in early trade. The FTSE is not only dealing with the weaker close on Wall Street but also a disappointing set of earnings from advertising giant WPP.

The big question now is how investors react to this pull-back. It’s possible that equities have further to fall if some additional profit-taking comes in ahead of the weekend. However, there is such strong bullish sentiment around at the moment that even the shallowest of dips are pounced on as buying opportunities - particularly by those who have missed the Trump-inspired rally so far.

However, there’s a growing expectation that the US Federal Reserve will raise rates again when it meets in just over a week’s time. The probability percentage of a hike has more than doubled since the beginning of the week as a gaggle of FOMC members have popped up to say that the conditions are set for additional monetary tightening. The US Unemployment Rate has been at or below 5% for sixteen consecutive months now. Meanwhile, inflation is picking up and is soon expected to hit the Fed’s 2% target. Add in to this the prospect of a huge dollop of fiscal stimulus from the Trump administration in the form of tax reform, infrastructure spending and regulatory roll-back and without a March hike there’s the danger that investors decide that the Fed is behand the curve. We may get a bit more certainty before the US c lose as US Federal Reserve Chair Janet Yellen and Vice-Chair Stanley Fischer both deliver speeches later this evening.

So far, investors are taking the prospect of higher rates in their stride. They believe that tighter monetary policy signals the Fed’s confidence in the US economy. Also, the Fed is seen as getting ahead of the curve, at least where inflation is concerned, while the business-friendly Trump administration is promising a fat dollop of fiscal stimulus on top.

Stock Index Update

Snap debuts with big premium

But new investors unable to cash in

Snap Inc. made its debut on the New York Stock Exchange opening above $24 per share. This represented a substantial premium to the issue price of $17 which valued Snapchat at about $24 billion. This was the first big tech IPO since Alibaba went public in 2014, and it was heavily oversubscribed. However, the issue is not without controversy as new investors are getting shares without voting rights. On top of that many new investors won’t be able to take advantage of the early premium. Snap has structured the IPO so that around 50 million of its Class A common stock is subject to a one year lock-up agreement. These shares have been earmarked for investors who currently don’t have a stake in the company. These are ridiculous conditions under which to offer the stock and anyone who bought under these restrictions runs a real danger of getting badly stung. The fact that the IPO was still so oversubscribed is just another sign that there’s some irrational exuberance behind the current rally in US equities.

Commodities Update

WTI and Brent pull back further from resistance

Precious metals slip

WTI and Brent fell sharply for the second consecutive session yesterday. This was despite some strong price action recently which suggested that both contracts were set to blast above resistance that’s held since early December. Crude has had plenty of buying interest ever since OPEC and a number of non-OPEC producers agreed to output cuts of around 1.8 million barrels per day last November. Recent data from Reuters and Bloomberg confirmed that OPEC production cut compliance had risen to 94% in February, up from 82% in January (or 90% if one believes OPEC’s own report). Non-OPEC compliance rose to 60-66% in February, up from 48% the month before. Combining all producers’ party to the November agreement gave a figure of 86% compliance. But US output continues to rise. Crude inventories stand at record levels and the US oil rig count is up for the sixth successive week.

Gold and silver slipped yesterday as the dollar rallied. Gold has pulled back sharply from the multi-month high that it made last week while silver has repeatedly run into resistance around $18.40. Both precious metals appear to be struggling in the face of the dollar’s push higher. This in turn has come as a result of investors recalculating the odds of a Federal Reserve rate hike later this month. The CME FedWatch Tool calculates the probability of a rate hike from the FOMC using the fed funds futures contract. Yesterday this indicated a 75% chance of a 25 basis point rise at the next FOMC meeting in less than two weeks’ time. This has more than doubled since the beginning of the week and it looks likely that the US central bank is preparing the markets for imminent monetary tightening. We have had a clutch of hawkish comments from Fed members this week and after the European close today we have speeches from the two most important members of the US Federal Reserve: Fed Chair Janet Yellen and Vice-Chair Stanley Fischer.

Forex Update

Dollar up again on rate hike expectations

Jump in Euro zone inflation fails to move euro

The dollar rallied further yesterday adding to gains made since Tuesday. The Dollar Index is up over 1% since Tuesday morning on a combination of hawkish Fed speakers and Trump’s speech to Congress. This time last week the market was assigning very little probability to the likelihood of a rate rise at the FOMC’s March meeting. However, investors are now betting that there’s more than an 80% chance of a rate hike, according to Bloomberg.

There was an unexpected pick-up in Euro zone inflation last month. CPI for February came in at 2.0% annualised, hitting a four year high. This was significantly above the 1.8% anticipated by analysts, and the surprise increase came mainly on the back of higher energy costs. The fresh data means that the inflation rate has effectively doubled since December and would appear to contradict ECB President Mario Draghi’s contention that the inflation spike seem at the end of last year was temporary. However, a glance at core CPI (the inflation measure which excludes food, energy, alcohol and tobacco) tells a different story. This came in at 0.9% annualised which is not only well below the ECB’s 2% target, but also unchanged from this time last year. Consequently, this latest inflation data does nothing to change the accommodative stance currently adopted by the ECB. The central bank is set to meet next Thursday.

Upcoming events

Today’s significant economic data releases and events include Spanish, Italian, French, German, Euro zone and UK Services PMIs. We also have German and UK Retail Sales together with the US ISM Non-Manufacturing PMI. FOMC-voting members Charles Evans and Jerome Powell will be speaking. But most importantly will be separate early evening speeches from Fed Chair Janet Yellen and her deputy Stanley Fischer.


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Posted by David Morrison

Category: AM Bulletin

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