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Video Update: Yellen’s speech sparks USD rally
31 Aug 2016
AM Bulletin: US dollar holds recent gains
31 Aug 2016
PM Bulletin: What next for the dollar?
30 Aug 2016
AM Bulletin: Investors revel in Fed’s “Goldilocks” worldview
30 Aug 2016
PM Bulletin: Yellen has spoken
26 Aug 2016
AM Bulletin: All eyes on Yellen
26 Aug 2016
PM Bulletin: BREXIT - THE NEXT CHAPTER The referendum and market reaction
25 Aug 2016
Holiday Schedule: Summer Bank Holiday
25 Aug 2016
AM Bulletin: Quiet start ahead of US Durable Goods/Jackson Hole
25 Aug 2016
Video Update: Look–ahead to Janet Yellen’s speech at Jackson Hole
24 Aug 2016
AM Bulletin: Investors edgy ahead of Yellen’s Jackson Hole speech
24 Aug 2016
PM Bulletin: Crude continues to slide
23 Aug 2016
Platform Tour: CFD Trading - How to Place a Trade
23 Aug 2016
AM Bulletin: Crude slide shrugged off by equities
23 Aug 2016
Trading Guides: How fast can you buy and sell with spread betting?
22 Aug 2016
Weekly Bulletin: Jackson Hole Symposium in focus
22 Aug 2016
PM Bulletin: Retailers bring earnings season towards a close
19 Aug 2016
AM Bulletin: Equities driven by oil and the Fed
19 Aug 2016
Video Update: The next Fed rate hike, the dollar and oil
18 Aug 2016
AM Bulletin: FOMC minutes read as dovish
18 Aug 2016
Trading Guide: How to choose a spread bet provider
17 Aug 2016
AM Bulletin: UK employment data and FOMC minutes in focus
17 Aug 2016
PM Bulletin: Dollar sell-off sends USDJPY below 100
16 Aug 2016
AM Bulletin: Yen stronger as investors de-risk
16 Aug 2016
Platform Tours: CFD Trading - How to Place Orders
15 Aug 2016
Trading Guides: What is spread betting?
15 Aug 2016
Weekly Bulletin: Summer “melt-up” continues
15 Aug 2016
PM Bulletin: Dow, S&P and NASDAQ hit all-time highs
12 Aug 2016
AM Bulletin: US indices hit fresh all-time highs
12 Aug 2016
PM Bulletin: Yen still strong, despite Japan’s stimulus
11 Aug 2016
AM Bulletin: Equities following oil
11 Aug 2016
PM Bulletin: Gold back within sight of multi-year highs
10 Aug 2016
AM Bulletin: US Crude Oil inventories eyed
10 Aug 2016
PM Bulletin: Sterling under pressure
09 Aug 2016
AM Bulletin: Stock markets calmer following last week’s rally
09 Aug 2016
Platform Tours: Spread Betting - How to Place a Trade
08 Aug 2016
Platform Tours: Spread Betting - Closure and Partial Closure
08 Aug 2016
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08 Aug 2016
PM Bulletin: FTSE 100 chart
08 Aug 2016
Weekly Bulletin: US Fed: the last hawk standing
08 Aug 2016
PM Bulletin: Non-Farm Payrolls soar
05 Aug 2016
July: Non Farm Payrolls Out Today
05 Aug 2016
AM Bulletin: BoE adds stimulus; Payroll numbers in focus
05 Aug 2016
PM Bulletin: Non-Farm Payroll look-ahead
04 Aug 2016
AM Bulletin: BoE rate decision in focus
04 Aug 2016
PM Bulletin: BoE look-ahead
03 Aug 2016
AM Bulletin: Earnings and Services PMIs in focus
03 Aug 2016
PM Bulletin: JPY rallies on stimulus disappointment
02 Aug 2016
AM Bulletin: JPY strengthens as Abe disappoints
02 Aug 2016
CFD Trading - Closure and Partial Closure
01 Aug 2016
Doubts over European stress tests
01 Aug 2016
Monetary policy driving investor behaviour
01 Aug 2016
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Economic Outlook 

Last week brought rate decisions from two of the world’s major central banks. On Wednesday the Federal Reserve surprised no one when it kept interest rates unchanged. However, opinion was sharply divided concerning the tone of the accompanying FOMC statement. Most analysts and commentators interpreted the statement as being hawkish and leaving the door open for a rate hike in September. However, the real money took a different view. By the time the markets closed the dollar had fallen sharply while precious metals had shot higher, suggesting that traders and investors read the statement as dovish. As far as the fed funds futures were concerned, the likelihood of any rate hike this year, whether in September or in December, has decreased. A September rate increase certainly seems unlikely as it would come just two months before the US Presidential Election. As far as I can see, this isn’t because the US central bank is too worried about being perceived as taking a political stance, but more the danger of roiling the markets just ahead of the vote. Back in December last year the Fed raised rates for the first time since June 2006. The move was seen as contributing to a sharp sell-off in risk assets in the first month of this year. Instead we can expect the Fed to continue with its rather obvious game plan: talking up the economy and the prospect of tighter monetary policy while keeping rates unchanged for the foreseeable future.

Meanwhile, the rest of the developed world’s central banks insist that they’re considering loosening monetary conditions further. At the end of last week the Bank of Japan (BOJ) concluded its highly anticipated two-day meeting. The consensus expectation had been that the BOJ would announce a large dollop of monetary stimulus to coordinate with the 28 trillion yen ($265 billion) fiscal stimulus that Prime Minister Shinzo Abe promised on Wednesday. But the BOJ came up short. The central bank kept its key interest rate unchanged, although it did increase its ETF purchase programme to 6 trillion yen from 3.3 trillion per annum. It also doubled its lending program for local companies. These measures were seen as rather insignificant, and in no way preparing the ground for “Helicopter Money” over which there has been son much speculation recently. The Nikkei tumbled in the immediate aftermath of the announcement, although the key Japanese stock index subsequently rallied and ended the day with modest gains. However, investors properly expressed their disappointment through the Japanese yen which soared against all the majors with the USDJPY crashing below 103 at one stage. This kind of move in the yen typically has a negative impact on global equities. However, European indices were mixed throughout the Friday session as investors positioned themselves for the month-end, and also for the results of the European Banking Authority’s Stress test results which were released after Friday’s close.

Investors are now looking ahead to this week’s Bank of England (BoE) meeting. Last month the Bank refrained from making any changes to monetary policy in the immediate aftermath of the Brexit vote. However, it signalled that it was prepared to ease further at this meeting should it see signs of any economic stress following the UK vote to leave the European Union.

This week’s major economic releases include:

Monday - CNY Manufacturing PMI, Non-Manufacturing PMI, Caixin Manufacturing PMI; EUR Spanish Manufacturing PMI, Italian Manufacturing PMI, French Final Manufacturing PMI, German Final Manufacturing PMI; GBP Manufacturing PMI; USD ISM Manufacturing PMI, Construction Spending.

Tuesday - AUD Cash Rate, RBA Rate Statement, Building Approvals, Trade Balance; EUR Spanish Unemployment Change, PPI; GBP Construction PMI; USD Core PCE Price Index, Personal Spending, Personal Income, Total Vehicle Sales

Wednesday - JPY Monetary Policy Meeting Minutes; CNY Caixin Services; EUR Spanish, Italian, French, German, Euro zone Services, Retail Sales; GBP Services PMI; USD ADP Non-Farm Employment Change, ISM Non-Manufacturing PMI, Crude Oil Inventories

Thursday - AUD Retail Sales; GBP BOE Inflation Report, Official Bank Rate, Monetary Policy Summary; USD Unemployment Claims, Factory Orders

Friday - AUD RBA Monetary Policy Statement; EUR German Factory Orders, Italian Industrial Production; CAD Employment Change, Trade Balance, Unemployment Rate; USD Non-Farm Payrolls, Average Hourly Earnings, Unemployment Rate, Trade Balance

   

Equities Outlook

We’ve just gone through the busiest week of the US earnings season and roughly 50% of companies in the S&P500 have now reported. So far the second quarter results have been something of a mixed bag. We’ve seen some notable beats where corporations have posted better-than-expected earnings and revenues, but there have been some high profile misses as well. But in just about all cases, the consensus expectations have been repeatedly marked down. What this means is that analysts have continually dialled back their predictions for corporate sales and earnings. So while investors raise a big cheer every time a company beats the market expectation, it generally means that the bar has been set low. This can be seen quite clearly when the actual year-on-year comparisons are taken into account. And one of the key metrics for measuring this is “blended earnings”. This is where the actual earnings of companies who have reported so far are “blended” with the market expectations for those companies still to announce their results. As at the end of last week, blended earnings were down 2.8% compared to this time last year. If this trend continues then this will end up being the fifth consecutive quarter of year-on-year declines in earnings. The last time this happened was from the third quarter of 2008 through to the third quarter of 2009. The blended revenue decline for revenues is 0.3%, and if this trend continues it will mark the sixth consecutive quarter of year-on-year declines.

Looking ahead, fourteen companies have issued negative earnings-per-share guidance for the third quarter while five have been positive. This is of interest as it is in the third quarter that the consensus expectation was for year-on-year earnings growth to finally materialise. But this expectation has been dialled down as well.  FactSet Research reports that there has been a change in analyst expectations for the third quarter. These have now shifted down from positive to negative.

It’s against this background that we go into the peak summer month of August. This is typically when trading volumes decline which means that volatility can pick up. Last year saw global equities slump on the back of a stock market melt-down in China. So it’s a good idea to be cautious, particularly as the major US indices continue to trade near record highs.

         

Commodity/ FX Outlook

Oil

The sell-off in crude oil continued last week as once again investors were more comfortable selling rallies than buying dips. As of Friday afternoon WTI was trading in “bear market territory” as it was down over 20% from its multi-month high above $51 hit back in early June. Brent was around 19% down over the same period.

Both contracts were trading at their lowest levels since mid-April, just after the Doha talks to agree a production freeze broke up acrimoniously. However, what was interesting about events back then was that even the failure of OPEC and non-OPEC members to agree to hold output at January levels couldn’t halt the rally taking place. Sentiment was such that investors shrugged off negative news and jumped on any data or research that was supportive of oil prices. This included reports of falling US production and oil inventories topping out, together with the prospect of accelerating demand growth throughout 2016 and into the following year. All this together suggested that supply and demand were set to come back into balance much sooner than had been predicted at the end of 2015. This led to a rally which saw oil nearly double in price between the beginning of the year and the first week of June. This rally followed a protracted sell-off which saw crude fall around 75% from the summer of 2014 until the beginning of this year. Back then crude fell as production levels soared thanks to improved fracking techniques and a pick-up in the dollar.

But as we head into the second half of the year, sentiment has soured once again. This time it’s clear that the supply glut looks set to continue for some time to come with US inventory levels at five year highs while research from JP Morgan suggests that China’s strategic petroleum reserve is close to full capacity. But the other side of the equation is demand growth which is slowing. Last week the Wall Street Journal reported that according to Barclays: “Global oil demand for the third quarter of this year is growing at less than a third of the rate it did in the same period a year ago. Slower economic growth has been the major contributor”. Meanwhile, Friday brought the first estimate for second quarter US GDP. This showed annualised growth of just 1.2% which was barely above the (upwardly revised) first quarter reading of +1.1% and well below the +2.6% consensus expectation.

   

Gold

Gold had a strong run up at the end of last week after a disappointing start. Prices began to pick up on Wednesday, firstly following the release of a poor set of Durable Goods numbers, but then after the release of the Fed’s rate decision and FOMC statement. The Fed kept rates on hold and released a statement which, on first glance, was ambiguous as to the timing of future rate hikes. Some investors interpreted the FOMC statement as leaving the door open for a September hike. This was because the committee noted that the near-term risks to the US economic outlook had diminished, while the employment situation continued to improve. However, the market reaction was unambiguous in that it saw less likelihood of any rate hike for the rest of 2016 – that is, even one in December after the US Presidential Election.

So buyers rushed back into gold as the prospect of low rates for longer (together with a tendency towards easier monetary policy from other major central banks) boosts the metal’s appeal. Gold may not pay interest or a dividend, but in a low to negative interest rate environment, that hardly matters.

Last week’s sell-off in the US dollar also helped to underpin the price of gold. Typically, gold priced in dollars rises as the greenback falls. This is because the cheaper dollar makes gold more attractive to holders of other currencies. The dollar had another leg down on Friday (and gold had another spike higher) following the release of US second quarter Advance GDP. This showed growth of just 1.2% annualised – well below the +2.6% anticipated. Once again, here was another data reading that suggests all is not well with the US economy, and further diminishes the probability of a Fed rate hike in 2016.

   

Forex

There were two big stories in FOREX last week: the sell-off in the dollar and the Japanese yen’s rally. As we head into August and peak summer, the dollar and yen should continue to stay in the headlines.

First we’ll look at the Dollar Index, which measures the greenback against a basket of currencies - with a large weighting towards the euro. Just over a week ago it was trading above 97.50 and at its highest level in over three months. By last Friday it had lost close to 2% - and most of that since Wednesday evening.  The EURUSD rallied by the same amount over the same period and chart-wise it now looks as if the area around 1.1000 should act as support going forward.

The trigger for the dollar sell-off was firstly, some weak data on Durable Goods and then the Federal Reserve meeting which saw the central bank leave rates unchanged. There was no expectation of a rate hike at this meeting. But the accompanying FOMC statement was considered more dovish than anticipated by both investors and traders, despite many commentators suggesting that the committee had left the door open for a September hike. But this wasn’t how market participants interpreted the FOMC’s comments. The fed funds futures market priced in a lower possibility of a 2016 rate hike in the immediate aftermath of the statement’s release.

On Friday it became apparent that traders got it right and the commentators were wrong. US second quarter GDP showed annualised growth of just 1.2% - well below the 2.6% anticipated. GDP is a lagging indicator, unwieldy and subject to significant revision.  Nevertheless, this was still a terrible number for anyone convinced that the US is set to drag the rest of the developed world out of stagnation.

Meanwhile, the Japanese yen soared after the Bank of Japan (BOJ) failed to deliver on additional monetary stimulus. The hope was that the BOJ would announce a raft of measures to complement Mr Abe’s promised 28 trillion yen spending commitment. The BOJ kept its key interest rate unchanged, increased its ETF purchase programme to 6 trillion yen from 3.3 trillion per annum and doubled its lending program for local companies. The news sent the Japanese yen soaring in a move that took the USDJPY crashing below 103. This is the last thing that Japanese policymakers need as they remain desperate to see their currency weaken in order to boost competitiveness and fend off deflationary pressures. If the yen rally continues to strengthen this week then there’s an increased likelihood of Japan intervening unilaterally in an attempt to push its currency lower – something that will not please other G20 members – particularly the US and China.

   

Quote: By the time the markets closed the dollar had fallen sharply while precious metals had shot higher, suggesting that traders and investors read the statement as dovish.

 

Posted by David Morrison

Tagged: Bulletin Weekly

Category: Weekly Bulletin


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