Incisive market commentary from David Morrison

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Market info update: Christmas & New Year's 23rd December 2016 - 2nd January 2017
20 Dec 2016
Investors ponder US inflation outlook - AM Briefing
16 Dec 2016
Markets react to FOMC “dot plot” - PM Bulletin
15 Dec 2016
Dollar soars on hawkish “Dot Plot” - AM Briefing
15 Dec 2016
FOMC rate decision in focus - Video Update
14 Dec 2016
Countdown to FOMC rate decision - AM Briefing
14 Dec 2016
US Federal Reserve look-ahead - PM Bulletin
13 Dec 2016
Federal Reserve begins two-day meeting - AM Briefing
13 Dec 2016
Bollinger Bands explained - Trading Guide
12 Dec 2016
Crude gaps higher and lifts equities - AM Briefing
12 Dec 2016
Trump surge morphs into Christmas rally - AM Briefing
09 Dec 2016
ECB tapers bond buying programme - PM Bulletin
08 Dec 2016
All eyes on ECB - AM Briefing
08 Dec 2016
Look-ahead to tomorrow’s ECB meeting - Video Update
07 Dec 2016
European stock indices surge higher in early trade - AM Briefing
07 Dec 2016
What is the MACD indicator? - Trading Guide
06 Dec 2016
Quiet start for European trading - AM Briefing
06 Dec 2016
Technical Indicators - Moving Averages - Trading Guide
05 Dec 2016
Italian PM Renzi resigns after losing referendum vote - AM Briefing
05 Dec 2016
US Non-Farm Payroll update - PM Bulletin
02 Dec 2016
Non-Farm Payrolls in focus - AM Briefing
02 Dec 2016
Non-Farm Payroll look-ahead - PM Bulletin
01 Dec 2016
Crude holds gains after OPEC move - AM Briefing
01 Dec 2016
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Early moves

Italian banks in focus

Reserve Bank of Australia holds rates unchanged

Italian Prime Minister Matteo Renzi may have lost his referendum. He may also have lost his position as Prime Minister. But that doesn’t mean that Italy has been plunged into a situation of political chaos. Rather, it is business as usual as it seems unlikely that there will be a General Election before 2018. However, this is not to say everything is peachy in Italy. The banking sector is under more pressure and it now looks as if Banca Monte dei Paschi (which ended 4.2% lower at €18.68 yesterday) will end up with a state rescue rather than a market one. However, this brings its own difficulties given European rules on banking bail-outs. Many bondholders in Italian banks are private individuals and small business owners. They were encouraged to buy bonds by the banks themselves who said they were safe investments. New rules mean that these investors will be wiped out in a government rescue, unless some kind of Euro-fudge is cobbled together. This will require agreement from Germany and could, in turn, have implications for the whole European banking sector, particularly given the difficulties still apparent at Deutsche Bank.

Overnight the Reserve Bank of Australia (RBA) left its Cash Rate unchanged at 1.5% as widely expected. There were a few analysts calling for a cut following last week’s poor Private Capital Expenditure number. But the RBA warned that a rising Aussie dollar could pose risks as the country shifts away from being a resource-reliant economy. The Aussie dollar is weaker this morning, giving back most of yesterday’s gains.

Stock Index Update

Equities recover after Italians vote “no”

But Italian banks sell off into the close

Italian Prime Minister Matteo Renzi officially resigned yesterday afternoon. This followed his defeat over his referendum on constitutional reform. It was a pretty comprehensive defeat as well. 60% of voters rejected his planned reforms with 40% backing him. This was on a highly respectable 70% turnout so was a solid rejection of Italy’s political establishment and a thumbs-down for the European Union. European equities fell sharply in early trade but reversed quickly. It felt as if investors had taken on board the market reaction to the Brexit and Trump votes and jumped in to capitalise on the sell-off as an opportunity to pick up stocks at “bargain” levels. There seems to be a widespread agreement that the “no” vote ensures that the European Central Bank (ECB) will step up purchases of Italian government bonds to keep a cap on yields. The ECB holds its last monetary policy meeting of the year on Thursday and is expected to extend its €80 billion per month bond purchase programme by a further six months.

Unfortunately, emergency measures by the ECB won’t prevent an Italian banking crisis. At best, they’ll buy Italy and the rest of Europe time. Italy’s banking system is weighed down by hundreds of billions of non-performing loans (estimated to be around €360 billion) and a number of troubled banks are currently preparing to tap investors for additional capital. But this will be much more difficult given the renewed political uncertainty. As the European close approached, investors once again cut back their exposure to Italian banking stocks.

Commodities Update

Post OPEC crude rally continues

Precious metals slump despite heightened market risk

Crude continued its post-OPEC meeting rally yesterday. Both Brent and WTI hit their best intra-day levels since July 2015 as investors continue to respond to the commitment made by the cartel to cut production by 1.2 million barrels per day (bpd). This should bring OPEC’s daily output back down to 32.5 million bpd which, if achieved, would be in balance with predicted global demand for OPEC output in 2017. Non-OPEC producers are also expected to step in with production cuts of their own totalling 600,000 bpd. Russia has promised to cut production by 300,000 bpd, although these cuts will come gradually over the first six months of 2017. In addition, this comes as Russia announced on Friday that daily oil production averaged 11.21 million bpd in November, its highest output since the Soviet era. What remains to be seen now is if producers stick to their promises and if US shale producers ramp up drilling in response to higher prices.

In the early hours of Monday morning gold and silver shot higher once it became apparent that Italian voters had rejected Matteo Renzi’s proposed constitutional reforms. Investors initially hoovered up the two precious metals as they sought out safe havens amidst market uncertainty. However, gold and silver soon gave up their gains and had plunged into negative territory as European markets officially opened yesterday morning. Gold was soon trading close to levels last seen in February this year. The turnaround came despite a pull-back in the US dollar which would usually help to lift precious metals. Overall, it appears that investors are in a bit of a quandary concerning how to reposition themselves following the referendum. While there’s no immediate risk of Italy leaving the euro, the outlook for Italian banks is more precarious than ever. But as things stand, investors appear convinced that the ECB will step in to dampen concerns over Italy’s major lenders.

Forex Update

EURUSD recovers after lurch down towards 1.0500

Dollar Index pulls back towards 100

Early yesterday the euro lurched lower as it became clear that Italian voters had rejected the constitutional reforms proposed by the Prime Minister Matteo Renzi. The EURUSD fell sharply and reached its lowest level since March 2015. This was when the currency pair briefly broke below 1.0500 after trading close to 1.4000 just nine months earlier. But yesterday the euro subsequently rallied. The Italian referendum has reduced the likelihood of a market-driven solution to the Italian banking crisis. Investors are betting on an increased probability of a state-led restructuring instead. However, that brings its own difficulties given European rules on banking bail-outs. New rules mean that many small investors will be wiped out in a government rescue, suggesting that some kind of Euro-fudge will soon be cobbled together.

In other news yesterday we saw the release of Services PMIs from around the world. There were modest yet significant improvements from China, Germany, Spain, Italy and the UK. But French and Euro zone Services PMIs both disappointed. Overall, the data was mixed and most analysts still believe that the ECB will extend its asset buying programme when it meets on Thursday.

Later in the day US ISM Non-Manufacturing PMI jumped to 57.2, up from 54.8 in the prior month. The consensus expectation was for a reading of 55.3. The data is yet another piece of evidence which suggests the US economy is strong enough to withstand a 25 basis point rate hike from the Fed next week.

Upcoming events

Today’s key economic data releases and events include German Factory Orders, the release of minutes from the last meeting of the Bank of England’s Financial Policy Committee, Euro zone GDP (revised), and ECOFIN meetings. From the US we have the Trade Balance, Non-Farm Productivity, Factory Orders and IBD/TIPP Economic Optimism.


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Posted by David Morrison

Category: AM Bulletin

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