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Central banks and US payrolls in focus - Weekly Bulletin
31 Oct 2016
Revised Trading Hours - UK British Summer Time (BST) ends, 30th October 2016
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US GDP in focus - AM Bulletin
28 Oct 2016
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Equities drift on mixed earnings
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Earnings season, oil and the US dollar - Video Update
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ECB Decision in less than 400 words - PM Bulletin
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US/UK inflation data in focus - AM Bulletin
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 Friday 28 October 2016

US GDP in focus - AM Bulletin

 

 

Indices Update

It looked as if global equity markets were in for a quiet session ahead of the open on Friday. Most of the major indices were little-changed and following Wall Street’s lead after an uneventful close on Thursday. However, European equities and US stock index futures turned lower soon after the open. There was no obvious reason for the negative sentiment. However, the third quarter earnings season continues to be mixed. Despite this the major US indices remain range bound. They look likely to remain so until we get more certainty concerning the outcome of the US Presidential Election and some clarity over the outlook Federal Reserve’s monetary policy. Later today we get the first look at US GDP for the third quarter. The consensus expectation is for growth to come in at +2.5% annualised – an improvement on the second quarter’s 1.4% increase.

It was a mixed session for European and US stock indices yesterday. This was somewhat surprising as crude oil rallied sharply on raised hopes of OPEC members agreeing to production cuts at next month’s meeting. Global stock indices are positively correlated to the oil price thanks mainly to the large amounts of corporate debt tied in to higher oil prices.

There were some better-than-expected earnings reports first thing which gave markets some initial support. Deutsche Bank surprised the market when it posted net income of $303 million on $8.17 billion of revenues. Analysts had been expecting a loss. However, there was some concern after the German banking giant only increased its legal provisions by a fraction taking it up to $6.5 billion. This may be considered a bit light considering the unresolved $14 billion penalty from the US Department of Justice hanging over the bank.  Meanwhile, Barclays got a boost from its investment banking division and posted better-than-expected third quarter profits. Deutsche Bank eked out modest gains yesterday while Barclays ended over 4% higher.

UK GDP rose by a much better-than-expected 0.5% in the third quarter, comfortably beating the +0.3% consensus forecast. UK Services (which account for around 80% of the economy) grew by +0.8% over the quarter. On a year-on-year basis GDP came in at +2.3% beating estimates of 2.1% growth. The data should scupper any thoughts that the Bank of England’s Monetary Policy committee will want to cut rates further at next week’s meeting. It already looks as if Mark Carney’s team jumped the gun when they sliced 25 basis points off the headline Bank Rate and rebooted their quantitative easing programme back in August.

The FTSE 100 index closed up 28.5 points, or 0.4%, at 6,986.6

The German DAX rose 7.4 points or 0.07% to end the day at 10,717.1

The US30 closed down 29.7 points to finish at 18,169.7. The S&P 500 ended 0.3% lower at 2,133 while the Nasdaq 100 ended down 0.5% at 4,836.5

Equities

Twitter (TWTR) released its third quarter results ahead of yesterday’s US open. “Adjusted” earnings came in ahead of expectations at $0.13 per share on revenues of $616 million. The market had anticipated $0.09 per share on $606 million. However, when calculated using GAAP (Generally Accepted Accounting Principles – a standard that most US stock-pushers have little interest in highlighting) the social media group posted losses of $0.15 per share. Average monthly active users for the three months to the end of September rose by 4 million from the second quarter to 317 million. Advertising revenue came in at $545 million, up 6% from the same period last year. Twitter announced a restructuring which included laying off 9% of its workforce. There has been much speculation over Twitter’s future over the last few months. Suggested suitors for the company have included Google and Salesforce although an actual bid has yet to materialise. Twitter was up over 5% in pre-market trade but gave back early gains to close just 0.6% higher at $17.40.

Commodities Update

After a quiet start to trade, crude oil popped higher yesterday afternoon. Traders bid up prices on talk that Gulf members of OPEC (including Saudi Arabia) had said they were prepared to cut production by around 4%. This was a piece of positive news ahead of the OPEC meeting scheduled for the end of November. Crude prices have been ebbing and flowing on rumour and counter-rumour concerning the likelihood that members of OPEC will follow through on their commitment made in Algeria at the end of last month to cut crude output in an attempt to boost prices.

But last weekend Iraq’s oil minister said the country should be exempt from production cuts due to its ongoing war with Islamic militants. There are already questions over exemptions being extended to Iran, Nigeria and Libya as all three countries have been unable to maximise production due to previous sanctions (in the case of Iran) and because of hostilities in Nigeria and Libya.

Meanwhile, oil is also swinging about on contradictory US inventory reports. After Tuesday’s close the American Petroleum Institute (API) reported a build of 4.8 million barrels on expectations of a 1.7 million barrel increase. This led to a sharp sell-off. However, prices reversed the following day when data from the Energy Information Administration (EIA) showed a drawdown in crude stockpiles of 600,000 barrels for the week ending 21st October. The consensus expectation was for a build of around 700,000 barrels. In addition, there was a 2 million barrel decline in gasoline stockpiles, a 3.4 million barrel drawdown in distillates and a decline of 2.1 million barrels in propane/propylene inventories. Total commercial petroleum inventories decreased by 8.7 million barrels last week.

In early trade this morning WTI was back below $50. Both WTI and Brent have struggled to break and hold above their highs from June of $51.60 and $52.80 respectively.

Gold and silver managed to rally in early trade yesterday, although both gave back most of their gains ahead of the European close as the US dollar pushed higher. Generally, dollar-denominated commodities struggle to make headway when the dollar is rising as it becomes more expensive for non-dollar holders to convert their currencies to make a purchase. Despite this, both metals have managed to steady and consolidate over the past couple of weeks despite a sharp dollar rally throughout October. The dollar has risen on the prospect of a Fed rate hike in December. Non-interest/dividend paying assets (such as gold and silver) tend to lose their attraction when yields are rising as investors seek out a “risk free” return on their funds. Tied into all this is the market expectation that Hillary Clinton is set to win the election on 8th November. Mrs Clinton is viewed as the “establishment” candidate who will ensure the status quo. And no doubt she will - unless the Democrats win a landslide and capture Congress as well.

Forex Update

It was a mixed session in FX yesterday. The US dollar pushed higher against the British pound and Japanese yen but drifted a touch against the euro and Swiss franc.  The dollar strengthened mid-afternoon following the release of the latest data of US Pending Home Sales. These rose 1.5% in September which was a big bounce-back following August’s 2.5% decline and was also better than the 1.2% increase expected. The release helped to allay fears of a housing slow-down which were exacerbated by Wednesday’s poor New Home Sales data.

Earlier in yesterday’s session US Core Durable Goods (which exclude transportation items) came in at +0.2% month-on-month which was as expected. However, on a year-on-year basis Core Durable Goods contracted for the 21st successive month. Despite this, there’s been little in recent US data releases to suggest that the Fed may want to hold back from raising rates before the end of this year. The CME’s FedWatch Tool suggests there’s now a 78.5% chance that the US central bank will hike in December. In contrast, there’s just a 9% probability of the Fed raising rates at next month’s meeting. This is understandable considering that the US Presidential Election takes place just one week later. As things stand, the polls suggest that Clinton should clinch the vote and if so, this increases the likelihood of tighter monetary policy from the Fed. This is because Clinton is considered a known quantity that will ensure the status quo (unless, that it, the Democrats also take back control of Congress). In contrast, Trump is considered a bit of a wild-card candidate who, if elected, could cause severe market disruption.

Sterling pulled back during the afternoon session despite spending most of the morning unchanged. The decline in the British pound came despite a better-than-expected first look at third quarter GDP. This rose 0.5%, comfortably beating the +0.3% consensus forecast. On a year-on-year basis GDP came in at +2.3% beating estimates of 2.1% growth. This latest release should scupper any thoughts that the Bank of England’s Monetary Policy committee will want to cut rates further at next week’s meeting. It already looks as if Mark Carney’s team jumped the gun when they sliced 25 basis points off the headline Bank Rate and rebooted their quantitative easing programme back in August in response to the Brexit vote.

Upcoming events

Today’s significant economic events include the release of German, French and Spanish CPIs. We also have French and Spanish GDP and the Swiss KOF Economic Barometer. From the US we have third quarter Advance GDP, the Employment Cost Index, Consumer Sentiment and Inflation Expectations.


Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: AM Bulletin

Category: AM Bulletin


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