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

Crude trades at 7-month low

Weighs on energy/financial sectors

Equity markets are on the back foot this morning as investors have finally woken up to the negative impact of the near-relentless sell-off in crude oil. Last night the major US stock indices all closed lower with the Dow and S&P500 recoupling with the tech-heavy NASDAQ.

Oil has come under relentless selling pressure since the OPEC meeting at the end of last month. There’s now an acceptance that OPEC and non-OPEC producers haven’t done enough to assure markets that they are capable of balancing global supply and demand. Despite their efforts to cut output by 1.8 million barrels per day, production from Libya and Nigeria (the two OPEC members exempted from the cut agreement) is on the rise. In addition, US output continues to grow as do exports.

Stock Index Update

Indices fall on oil weakness

FTSE lower despite sterling pull-back

Last night US stock indices drifted lower. Once again some of the biggest losses were in tech stocks and this saw the NASDAQ fall by 0.8%. However, the Dow and S&P500 also lost ground as investors finally woke up to the damage being done to the energy and banking sectors by the sell-off in crude oil.

European stock indices were modestly higher on the open yesterday, helped along by fresh record closes for the Dow and S&P500 on Monday night. However, all the majors turned lower as the session progressed and ended the day with modest losses. Investors were unsettled by a continuation in the sell-off in crude oil. Yesterday both WTI and Brent hit their lowest levels since early November, ahead of the OPEC meeting when output cuts were agreed. The pull-back in oil weighed on stocks in the energy sector. Investors also cut their exposure to UK multinationals in a move which saw the FTSE100 end the session lower. This was unusual given yesterday’s fall in sterling which was triggered by comments from Bank of England Governor Mark Carney. A weaker pound is generally positive for the FTSE100 as it boosts the sales and earnings of UK multinationals.

Last week the Federal Reserve raised rates by 25 basis points as expected. The Fed is also preparing to hike rates again and begin the process of balance sheet reduction before the year-end. Yet investors seem remarkably sanguine about the prospect of higher borrowing costs. Partly this is because the European Central Bank and Bank of Japan continue to provide significant stimulus. But it’s also because the Fed’s actions suggest that the central bank has confidence in the US economic outlook. But there’s also possibly something else at play here - investors don’t believe the Fed. According to the CME’s FedWatch Tool investors assign a probability of less than 50% that the central bank will hike again before year-end. If that’s what they think, then it suggests they don’t share the fed’s optimism over the US economic outlook.

Commodities Update

Crude slumps ahead of inventory data

Precious metals struggle to find support

Last night after the close the American Petroleum Institute (API) released its latest US inventory report. This showed builds in gasoline and distillates, but a drawdown in crude stockpiles. Overall, there was little market reaction and traders now await today’s update from the Energy Information Administration.

Crude oil fell sharply yesterday ahead of the API’s latest inventory update. The latest move saw WTI and Brent trade down to their lowest levels since mid-November last year. This is of particular significance as the lows back then preceded a key OPEC meeting just a fortnight later. This was when OPEC together with a number of other significant producers came up with an agreement to cut output. The idea behind this was to attempt to address oversupply issues as oil producers were desperately pushing up production in an attempt to boost revenues as prices declined. Yet global growth rates had failed to recapture pre-crisis levels and this contributed to global inventories hitting record highs. The OPEC/non-OPEC producers agreed to extend, but not deepen, their agreed output cuts. This has disappointed investors and oil has fallen ever since. On top of this, production from Libya and Nigeria (two OPEC countries exempt from output cuts) is picking up. But it’s worth remembering that oil is a traders’ market and it’s currently looking somewhat oversold - technically at least. It would only take a rise in geopolitical tensions or a significant inventory drawdown to see prices bounce back sharply.

Gold and silver were firmer in early trade yesterday. However, both precious metals gave up these gains as the US open approached. It seems that while Asian Pacific investors appear comfortable enough to buy both metals following the recent pull-back, there’s little appetite for these two “safe havens” as far as US investors are concerned. This makes sense given that risk appetite remains elevated with the Dow and S&P500 both trading near all-time highs. In addition, the Federal Reserve seems determined to tighten monetary policy and typically higher interest rates are negative for gold and silver. This is particularly the case in times of falling inflation as real interest rates (that is, rates minus inflation) rise faster as inflation declines. This makes non-yielding assets such as gold and silver less attractive for investors.

Forex Update

Sterling slips after Carney speech

But support for UK hike grows within MPC

Sterling has fallen sharply following yesterday’s speech from Bank of England Governor Mark Carney. Mr Carney said that now was not the right time to raise interest rates in the UK. He cited mixed signals on consumer spending and business investment along with anaemic wage growth as contributing to subdued domestic inflationary pressures. He also had his customary pop at the UK’s referendum decision to leave the European Union, saying that monetary policy could not prevent weaker real income growth which was likely to “accompany the transition to the new trading arrangements with the EU.”

His comments follow last week’s Monetary Policy Committee (MPC) meeting where three out of eight members were in favour of increasing the headline Bank Rate. Investors were taken by surprise after Ian McCafferty and Michael Saunders joined Kristin Forbes in voting for an immediate 25 basis point rate hike. What this means is that the MPC is now only two votes away from raising rates, no matter what Mark Carney says or does. The latest update on UK CPI came in at 2.9% and so is well above the Bank’s preferred target of 2%. In addition, the MPC noted that there’s less slack in the UK labour market which suggests that wage pressures could soon start to pick up and add to growth.

Upcoming events

Today’s significant events and economic data releases include UK Public Sector Net Borrowing and the Swiss National Bank’s Quarterly Bulletin. From the US we have Existing Home Sales and Crude Oil Inventories.


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Posted by David Morrison

Category: PM Bulletin

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