Incisive market commentary from David Morrison

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Collapse 2017 <span class='blogcount'>(348)</span>2017 (348)
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GDP data in focus - AM Briefing
28 Apr 2017
ECB round-up and US GDP look-ahead - Video Update
27 Apr 2017
ECB meeting in focus - AM Briefing
27 Apr 2017
ECB's Rate Meeting, a look ahead - Video Update
26 Apr 2017
High hopes for Trump tax cuts - AM Briefing
26 Apr 2017
Global stock indices storm higher - PM Bulletin
25 Apr 2017
Indices mixed after firmer open - AM Briefing
25 Apr 2017
How to use Stop Losses in FX - Trading Guide
24 Apr 2017
French vote sees risk assets soar - AM Briefing
24 Apr 2017
Mixed European open despite Wall Street rally
21 Apr 2017
French Election in focus - Video Update
20 Apr 2017
French election and oil keep investors cautious - AM Briefing
20 Apr 2017
Equities off highs but still show resilience - Video Update
19 Apr 2017
Equities continue to drift lower - AM Bulletin
19 Apr 2017
Sterling soars on early UK election, but France the biggest concern
18 Apr 2017
Europe shrugs off US rally - AM Bulletin
18 Apr 2017
Trump's mouth sends dollar skidding lower - Video Update
13 Apr 2017
Dollar slumps on Trump comments - AM Bulletin
13 Apr 2017
Uncertain outlook ahead of holiday weekend - Video Update
12 Apr 2017
Equities recover after yesterday’s wobble - AM Briefing
12 Apr 2017
USDJPY approaching support - PM Bulletin
11 Apr 2017
Equities drifting in holiday-shortened week - AM Briefing
11 Apr 2017
Look-ahead to Janet Yellen’s speech this evening - PM Bulletin
10 Apr 2017
All eyes on G7 and Yellen - AM Bulletin
10 Apr 2017
US missile attack sends investors into “risk-off” mode - AM Briefing
07 Apr 2017
FOMC minutes rattle investors - Video Update
06 Apr 2017
Stunning reversal greets Fed minutes - AM Briefing
06 Apr 2017
ADP number points to big payroll beat on Friday - Video Update
05 Apr 2017
FOMC minutes in focus - AM Briefing
05 Apr 2017
US indices flag as first quarter ends - PM Bulletin
04 Apr 2017
Disappointing start to the new quarter - AM Briefing
04 Apr 2017
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Early moves

Equities slump on Fed minutes

US-China summit begins

There was a stunning reversal on Wall Street last night which saw the majors give back all their early gains and more. Earlier in the session equities soared following a stronger-than-expected US ADP payroll number. This foreshadows tomorrow’s Non-Farm Payroll release and suggests that we could see another blow-out number - the third in succession. Overall, investors saw this as a further indication that the US economy is improving, justifying slow but steady monetary tightening from the Federal Reserve.

However, equities slumped following the release of minutes from last month’s Fed meeting. These suggested that the US central bank could be prepared to start winding down its $4.5 trillion balance sheet before the year-end, as long as this was warranted by the economic data. While such a move was hinted recently by FOMC Vice Chair Bill Dudley, it still took investors by surprise. Of particular concern was that the Fed would consider winding down both Treasuries and mortgage-backed securities. The consensus expectation had been that they’d look to reduce the mortgage element first. In addition, a number of Fed members expressed the view that equities looked expensive by some valuation measures.

Interestingly, the dollar fell on the news and precious metals rallied. This appeared to be more of a knee-jerk “risk-off” move due to overall market surprise rather than a more measured reaction to the Fed’s announcement. But there’s also some caution ahead of the start of a two-day summit between the US and China. President Trump and Chinese Premier Xi Jinping hold meetings over today and tomorrow. Just last week President Trump sent out a tweet about the meeting saying it wouldn’t be easy as "we can't have massive trade deficits … and job losses."

Stock Index Update

Equities slump after Fed minutes

ADP data fuels hopes of strong payroll number

US stock indices slumped following the release of the Fed’s minutes from its March meeting. Investors were spooked by suggestions that the US central bank could look to wind down its $4.5 trillion balance sheet later this year. In addition, some Fed members noted that stock prices were “quite high”.

There was relatively little movement in US and European stock indices yesterday until the release of some US employment data. The ADP Non-Farm Employment Change showed an increase of 263,000 jobs in March, miles above the 184,000 expected. The news triggered a rally in US stock index futures which accelerated into the open and took the European majors with them. The ADP number has a patchy history when it comes to predicting official Non-Farm Payroll data, due out tomorrow. However, it’s extremely good at giving a “heads-up” for a big surprise, either up or down. Consequently, yesterday’s big positive surprise suggests we should get a better-than-expected reading from tomorrow’s number.

Despite a long run of strong jobs numbers there are some concerns that US economic growth isn’t as robust as it should be. Other “hard data” numbers like Durable Goods, Retail Sales, Construction Spending, Vehicle Sales and Factory Orders have all disappointed recently. This is happening as the Fed proceeds to tighten monetary policy and even hints of starting to wind down its balance sheet later this year. Meanwhile Donald Trump’s promised tax cuts, infrastructure spending, and even regulatory roll-back still look like election promises which may be fulfilled sometime in the future rather than providing fiscal stimulus right now. There’s even been some concern recently that survey data (which has been particularly strong since Trump’s election win in November) such as Consumer Confidence, ISM Manufacturing and Non-Manufacturing PMIs may also be coming off their best levels. Yet this hasn’t put even a small dent in the ongoing stock market rally which saw the NASDAQ hit a fresh record high yesterday.

Commodities Update

Latest inventory release shows large build

Precious metals bounce after Fed minutes

WTI and Brent were sharply higher in early trade yesterday. This was a continuation of the rally which took hold towards the end of March and followed on from Tuesday’s latest US inventory release from the American Petroleum Institute (API). This showed a larger-than-expected drawdown in crude inventories and investors expected this to be confirmed in yesterday’s official inventory update from the Energy Information Administration (EIA). However, the EIA release showed an unexpected build in crude stockpiles of 1.6 million barrels – well above the 100,000 barrel drawdown anticipated. Crude prices slumped on the news. They fell further following the release of the Fed’s minutes from its meeting last month. Markets were spooked by the suggestions that Fed members felt stock prices were “quite high” and that it was time to look at reducing its balance sheet.

Despite this, WTI has still retraced over half of its pull-back from late February to mid-March. The question now is how much more upside there is in the current move. Undoubtedly, the market is more balanced than it was during the sell-off as the excessive long-side speculative positioning that was seen prior to last month’s slump has been covered. WTI and Brent still have a few dollars of upside each before they hit significant resistance. But fresh buyers will want to see concrete moves to extend the output cut agreement between OPEC and a number of non-OPEC producers beyond June. Without this, we could see a limit to further gains particularly if the US rig count continues to rise, and if inventories don’t start to decline significantly.

Gold and silver both traded in negative territory throughout the early part of the European session. They fell further following the release of the US ADP payroll number. This came in well above the consensus expectation suggesting that tomorrow’s Non-Farm Payrolls should be strong, pointing to continued US economic strength. This increases the likelihood of further monetary tightening from the US Federal Reserve this year, which in turn supports the dollar. Investors tend to bail out of gold and silver when the dollar rises and on the prospect of higher US interest rates. A rising dollar makes gold more expensive for holders of other currencies, while higher bond yields dampen demand for precious metals which typically don’t provide a yield. But both metals shot higher following the release of Fed minutes. This was a “safe haven” move by investors who were spooked by suggestions that stock prices were “quite high” and that the Fed could look to reduce its balance sheet later this year.

On Tuesday gold briefly poked its head above $1,260 and managed to record its highest intra-day high since the end of February. Investors appeared to be picking up precious metals as a safe-haven play after North Korea undertook another missile test. This came just ahead of the two day summit between the US and China which begins today.

Forex Update

Dollar slumps after Fed minutes

Sterling rallies on Services data

Last night’s release of minutes from the Fed’s meeting last month led to a sharp sell-off in the US dollar. This was something of a counter-intuitive move given that Fed members were talking about reducing the $4.5 trillion balance sheet later this year. After all, this is another form of monetary tightening which should be dollar-supportive. However, investors were taken by surprise by the news. They were also concerned as some Fed members suggested that stock prices were “quite high.” However, the greenback has steadied in early trade this morning.  

The dollar was little-changed in early trade yesterday. However, it rallied straight after the ADP payroll release. This showed monthly job gains of 263,000 in March, way above the 184,000 expected. The dollar made most headway against the Japanese yen, but traders appeared unwilling to take on too much exposure ahead of talks between US President Trump and his Chinese counterpart Xi Jinping. These start later today and continue on Friday. The two leaders are expected to discuss trade and security amongst other issues.

Yesterday brought the release of Services PMIs from the UK and across the Euro zone. Spain, Italy and France all registered month-on-month declines in their respective PMIs while Germany’s was unchanged. For the Euro zone as a whole, the Services survey slipped to 56.0 in March down from 56.5 in the prior month. Meanwhile, UK Services came in at 55.0 comfortably above both the 53.5 expected and the prior month’s reading of 53.3. The news saw sterling fly higher and cable bounced off its 50-day exponential moving average around 1.2416, making back all of Tuesday’s losses. 

Upcoming events

Today’s significant economic data releases and events include Swiss CPI, UK Housing Equity Withdrawal and the accounts from the last ECB Monetary Policy Meeting. From the US we have Challenger Job Cuts and Unemployment Claims. Then ECB President Draghi speaks in Frankfurt at 21:00 BST.


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Posted by David Morrison

Category: AM Bulletin

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