Incisive market commentary from David Morrison

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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 slide after US attack on Syrian airbase

Non-Farm Payrolls in focus

There’s been a widespread cut in risk exposure in early trade this morning. This has led to a pull-off in global stock indices primarily on the news of the US missile strike on a Syrian airbase. Investors were already nervous after Wednesday’s sharp sell-off in equities which followed the release of minutes from the Fed’s meeting in March. This saw Fed members warn that stocks were looking expensive by some measures. In addition, the US central bank pulled forward the timetable for reducing its $4.5 trillion balance sheet, while pushing back their forecasts for fiscal stimulus. On top of that there is some nervousness as President Trump meets his Chinese counterpart Xi Jinping in Florida.

One bright spot has been the US ADP employment numbers which were released on Wednesday. These soared above the general market expectation and this has led to a sharp upgrade in predictions for this afternoon’s Non-Farm Payroll number. The consensus forecast comes in around an increase of 174,000. But there’s a feeling now that anything under 200,000 will be considered disappointing.

Stock Index Update

Indices recover after Fed-catalysed sell-off

Still some caution after Fed warns stocks “expensive”

European and US stock indices pushed higher yesterday afternoon. The day had begun with a sharp sell-off across the majors after the release on Wednesday night of minutes from the US Federal Reserve’s meeting in March. Investors were spooked by suggestions that the US central bank could look to wind down its $4.5 trillion balance sheet later this year. Previously, most market participants felt that this wouldn’t happen until later in 2018. Not only that, but a number of Fed members expressed the view that equities looked expensive by some valuation measures. Some also suggested that markets were rallying on increased risk tolerance and the promise of fiscal stimulus rather than confidence in the US growth story. Overall, the minutes suggested that the Fed was relaxed about equities heading lower, and that rattled investor confidence.

There were also concerns that the “Trumpflation” trade could be coming to an end. This accounts for much of the stock market rally which followed Trump’s election victory back in November. Investors piled into equities betting that the Trump administration would drive through inflationary measures such as tax cuts, infrastructure spending and regulatory roll-back. However, so far Trump has been unable to repeal and replace Obamacare while tax reform may also prove unattainable. House Speaker Paul Ryan said changing tax policy could take longer than overhauling healthcare. He said there was currently no consensus between the White House, Senate and House Republicans over tax cuts.

Commodities Update

Crude spikes on US missile attack

Gold and silver also surge

Oil prices have spiked higher overnight on news that the US had launched a missile attack on a Syrian airbase. The US has said that this airfield was used in the chemical attack which took place earlier in the week.

Crude was already recovering yesterday following a sharp sell-off which was triggered by latest inventory update from the Energy Information Administration (EIA). This 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 and 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.

But yesterday WTI and Brent managed to find support around $50.80 and $54.00 respectively. Both contracts were helped to recover by a recovery in equity markets. Investors cautiously re-established long positions. This was despite the uncertainty surrounding meetings between President Trump and his Chinese counterpart Xi Jinping and today’s Non-Farm Payroll release.

Gold and silver shot higher overnight following news of a US missile strike on a Syrian airbase. The US has said that Syrian aircraft responsible for the chemical attack earlier in the week came from this airfield. Russia was warned of the attack which has been strongly condemned by Russia President Putin.

Ahead of this news precious metals drifted lower for most of yesterday, giving back gains made on Wednesday. Both precious metals flew higher following the release of the minutes from the Fed’s meeting last month. Investors rushed into the relative safety of the two precious metals after the minutes indicated that members of the central bank felt that equities looked expensive on a number of valuation metrics. Not only that but it looks as if the US central bank could look to reduce its $4.5 trillion balance sheet later this year. This is somewhat earlier than previously considered. In addition, the Fed is considering winding down both Treasuries and mortgage-backed securities at the same time. The consensus expectation had been that they’d look to reduce the mortgage element first. Finally, there’s talk of an immediate end to reinvestment of maturing bonds rather than gradual tapering.

Gold has attempted and failed to break above $1,260 on a number of occasions since late February. Meanwhile, silver continues to struggle to break above $18.40 - a level it last closed above just after Trump’s election victory last November.

Forex Update

Dollar recovers after Fed-inspired sell-off

ECB President Draghi helps to talk down euro

There was a general move out of the dollar overnight and into the Japanese yen - the market’s default “safe haven” currency. This followed on from the news that the US had launched a missile attack on a Syrian airfield said to be the base for aircraft which employed illegal chemical weapons earlier this week.

The dollar recovered in early trade yesterday following a sharp sell-off on Wednesday night. The pull-back followed the release of minutes from the Fed’s March meeting which suggested 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 FOMC Vice Chair Bill Dudley hinted at such a move quite recently, it still took investors by surprise. Of particular concern was that the Fed would consider winding down its holdings of both Treasuries and mortgage-backed securities. The consensus expectation had been that they’d look to reduce the mortgage element first. In addition, there was talk that once the process began there would be an immediate end to reinvestment of maturing bonds rather than gradual phasing.

This implies less market liquidity and less support for bonds, so suggests lower bond prices and rising Treasury yields. This would suggest that the dollar should have rallied on the news. After all, as Janet Yellen has pointed out, this is another form of monetary tightening. Instead, investors rushed to dump US assets and piled into the relative sage havens of the yen, gold and silver.

But the dollar also got a boost after comments from ECB President Mario Draghi. Speaking at a conference in Frankfurt Mr Draghi said that a reassessment of the ECB’s current monetary policy stance was unwarranted as there was “insufficient evidence” that inflation was picking up.

Upcoming events

We have some significant data releases from the UK this morning including Manufacturing Production, Goods Trade Balance, Construction Output and Industrial Production. We also have a speech from Bank of England Governor Carney. Hopefully he will explain why the Bank insists on keeping interest rates so low despite an obvious pick-up in both the UK economy and inflation. But today’s main event is the latest US Non-Farm Payroll update. Alongside this we’ll get the Unemployment Rate and Average Earnings. Later in the day we have US Wholesale Inventories and a speech from Federal Reserve Bank of New York President William Dudley.


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Posted by David Morrison

Category: AM Bulletin

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