Incisive market commentary from David Morrison

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Expand 2017 <span class='blogcount'>(348)</span>2017 (348)
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Expand December <span class='blogcount'>(23)</span>December (23)
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OPEC agrees to production cut - Video Update
30 Nov 2016
OPEC meeting in focus - AM Briefing
30 Nov 2016
A look-ahead to tomorrow’s OPEC meeting - PM Bulletin
29 Nov 2016
Mixed start for equities; crude lower - AM Briefing
29 Nov 2016
An introduction to technical analysis - Trading Guide
28 Nov 2016
Softer tone across risk assets - AM Briefing
28 Nov 2016
Crude, dollar and equities slip in holiday-shortened session
25 Nov 2016
ECB warns of uncertain outlook - Video Update
24 Nov 2016
Slow start as US closed for Thanksgiving - AM Briefing
24 Nov 2016
Gold slumps below key support
23 Nov 2016
Probability of Dec Fed hike hits 100% - AM Briefing
23 Nov 2016
Sterling slips ahead of Autumn Statement - PM Bulletin
22 Nov 2016
US stock indices hit fresh record highs - AM Bulletin
22 Nov 2016
How to read candlestick charts - Trading Guides
21 Nov 2016
US dollar pulls back from highs - AM Bulletin
21 Nov 2016
Dollar continues to surge - AM Bulletin
18 Nov 2016
Crude rebounds despite inventory rise - PM Bulletin
17 Nov 2016
Equity rally slows - AM Bulletin
17 Nov 2016
US dollar continues to rally - Video Update
16 Nov 2016
Dollar holds recent gains - AM Bulletin
16 Nov 2016
Dollar Index tests resistance - PM Bulletin
15 Nov 2016
Dollar soars as bonds slide - AM Bulletin
15 Nov 2016
What is Swing Trading?
14 Nov 2016
Markets adjust to Trump presidency - Weekly Bulletin
14 Nov 2016
Trump win sees investors rethink their portfolios - AM Bulletin
11 Nov 2016
Equities up, but bonds are down - PM Bulletin
10 Nov 2016
Market responds to Trump win - AM Bulletin
10 Nov 2016
US Election fall-out - Video Update
09 Nov 2016
Markets react to Trump win - AM Bulletin
09 Nov 2016
US Election – possible outcomes and market reaction - Video Update
08 Nov 2016
US election result is all that matters now - AM Bulletin
08 Nov 2016
What is day trading? - Trading Guides
07 Nov 2016
Election uncertainty spooks investors - Weekly Bulletin
07 Nov 2016
Market info update: US Election Market Changes
04 Nov 2016
US Non-Farm Payrolls in focus - AM Bulletin
04 Nov 2016
Non-Farm Payroll look-ahead - PM Bulletin
03 Nov 2016
Equities mixed ahead of BoE Inflation Report - AM Bulletin
03 Nov 2016
Central bank meetings and election polls - Video Update
02 Nov 2016
FOMC rate decision ahead - AM Bulletin
02 Nov 2016
Bounce-back in precious metals - PM Bulletin
01 Nov 2016
RBA and BOJ leave rates unchanged - AM Bulletin
01 Nov 2016
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Indices Update

European equities and US stock index futures were drifting lower in early trade this morning. There’s a very skittish feel to markets at the moment and a great deal of nervousness building ahead of next week’s presidential election. There’s a growing risk that even if there is an outright winner in terms of Electoral College votes, the result could be challenged in the courts. If so, then we could have months of uncertainty and the very real danger of seeing the US more divided and fractious than ever. If so, this won’t be a positive investment environment.

It was a mixed open for European equities yesterday. Crude oil was firmer in early trade while the Dollar Index drifted a touch. On Wednesday the US Federal Reserve kept monetary policy unchanged, as expected. Nevertheless investors remain jittery ahead of next week’s US Presidential Election. The latest ABC/Washington Post poll showed that Clinton had taken back a small 2% lead over Trump. Trump had a 1% lead at the beginning of the week after being 13 points behind just seven days earlier. By Wednesday the two candidates were tied and now Clinton is slightly ahead. Needless to say, all these results fall well inside the usual margin of error in such polls.

The election is, of course, the most important event in the calendar. As noted above, we may not have a clear winner after next week’s vote. But at some stage investor focus will turn back to the likelihood of a Fed rate hike before the year-end. The US central bank has spent the last couple of months convincing the markets that it’s ready to go in December, and Wednesday night’s FOMC statement reinforced the case. But much depends on how the data comes in over the next six weeks, along with any market fall-out following next week’s election. It’s possible the Fed could delay a rate hike if Trump wins the presidency as the market hasn’t fully priced in this possibility. But putting that aside, the only other thing that could stay the Fed’s hand is a significant deterioration in the US economic data between now and then.

So the focus turns to this afternoon’s Non-Farm Payrolls. The consensus expectation is for an increase of 176,000 jobs. This would represent a decent bounce-back from September’s weak report when 156,000 jobs were created on expectations of 171,000. As a consequence, investors are likely to be disappointed by anything below 160,000 (leaving aside any revisions to last month’s data) and this should lead to further losses for the dollar and gains for precious metals. A good number will be anything above 180,000 or so.

But today’s number would have to be a real shocker (say, 120,000 or lower) to derail a December rate hike. Even then, investors would soon put this aside to see how the release in early December comes in.

Yesterday morning China’s Caixin Services PMI rose to 52.4 in October from 52.0 the prior month. Earlier in the week there were similar pick-ups in the Caixin Manufacturing PMI and also China’s official Manufacturing and Non-Manufacturing data. This latest round of data has helped to reassure investors who were concerned by the recent slide in the yuan and a pull-back in Chinese equities.

The US30 closed down 29 points to finish at 17,930.7. The S&P 500 ended 0.4% lower at 2,088.7 while the Nasdaq 100 ended down 1.0% at 4,679.1


The share price of Facebook (FB) tumbled in after-hours trading on Wednesday night, following the release of third quarter earnings. This was despite posting adjusted earnings of $1.09 per share, up from $0.57 a year ago. Analysts had expected $0.97 per share. Revenues were also strong, coming in at $7 billion - up 56% on the same time last year, and just beating the consensus estimate of $6.9 billion. Advertising made up $6.8 billion of sales (better than the $6.7 billion forecast) and this is part of the problem. Facebook’s CFO David Wehner warned that ad load (the number of adverts on the site) could “come down meaningfully” in the second half of next year while revenue growth could slip next quarter. Despite this, the company still sees opportunities for both user growth and time spent on the platform. Yesterday the stock closed 5.6% lower at $120.00

Commodities Update

Crude steadied in early trade yesterday following a sharp pull-back over the last two weeks. It looked as if traders were getting ready to engineer a short-covering bounce as both WTI and Brent have fallen around 12% since hitting their respective four month highs back on 20th October. However, there was very little bullish appetite and it wasn’t long before both contracts slid back into negative territory. It looks as if WTI and Brent are on course to test support around $43.50 and $46 respectively.

The current sell-off began as doubts crept in over OPEC’s commitment to instigate production cuts after its meeting at the end of this month. There are a number of OPEC countries who believe they should be exempt from any order to curb output including Iran, Iraq, Nigeria and Libya. On top of this it is looking increasingly doubtful that non-OPEC producers will take part in any agreement to curb production. Adding to the pressure on oil prices was news that Russia’s output hit a post-Soviet record of 11.2 million barrels per day in October.

Prices came under additional pressure following the latest updates for US crude inventories. Earlier in the week the American Petroleum Institute (API) reported a build in crude stockpiles of 9.3 million barrels - way above the 1.5 million expected and the largest inventory build since March. Then on Wednesday the US Department of Energy’s Energy Information Administration (EIA) recorded an increase of 14.42 million barrels on expectations of a 2 million barrel build. This represented the biggest build in inventories in the whole 34 year history of the EIA data series.

Gold and silver fell sharply in early trade yesterday.  The sell-off in the two precious metals followed the US Federal Reserve’s FOMC meeting on Wednesday evening. As expected, the FOMC held off from making any changes to monetary policy and this meeting wasn’t followed with a press conference from Fed Chair Janet Yellen. Nevertheless, there were a couple of points worth noting. Firstly, there was one significant change in the Fed’s statement. The phrase, “Inflation is expected to remain low for the near term" was replaced with: "Inflation is expected to rise to 2% over the medium term." Secondly, the FOMC stated that the case for an increase in the fed funds rate had continued to strengthen. Both points were seen as raising the likelihood of a December rate hike and this gave traders a good excuse to sell precious metals - especially given their large gains earlier in the week.

Thanks to the Fed’s statement, the dollar managed to steady somewhat. It fell sharply on Friday following the FBI’s decision to reopen its investigation into emails from Hillary Clinton’s private server. It fell further after a number of opinion polls showed that Donald Trump had closed the gap and even taken a small lead in a poll commissioned by ABC/Washington Post. But the greenback was unable to recover lost ground yesterday and investors used this as a platform for pushing gold back into positive territory. Silver also recovered a significant proportion of its earlier losses.

Forex Update

Sterling shot higher in mid-morning trade yesterday after the High Court ruled that the UK government cannot trigger Article 50 without parliamentary approval. The news was a blow to Prime Minister Theresa May who had insisted that it was up to the government alone to initiate Article 50. The government is expected to appeal the decision and the Supreme Court has earmarked December 7 and 8 to hear the case.

Sterling made further gains after the Bank of England held off from easing rates further or adding to its Asset Purchase Facility after its latest monetary policy meeting. Back at the beginning of August the Bank’s MPC cut the headline Bank Rate by 25 basis points to 0.25%. At the same time it restarted its quantitative easing programme and suggested that it would cut rates again before the year-end. However, the Bank has now back away from this threat, citing the depreciation of sterling and the risk of inflation significantly overshooting its 2% target while playing down the economic risks of the Brexit vote. The BoE also stated that: “…there are limits to the extent to which above-target inflation can be tolerated." This suggests that tighter monetary policy in future cannot be ruled out.

The Bank hiked its inflation forecast for 2017 to 2.7%, up from 2.05 in August. It raised its 2017 GDP forecast to 1.4% from 0.8%.

The US dollar was relatively steady yesterday. Investors caught their breath following the steep sell-off in the greenback since last Friday evening. The sell-off followed news that the FBI was reopening its investigation into Mrs Clinton’s use of a private server for emails while she was Secretary of State. There is also talk that the FBI’s investigation is expanding to include the controversial Clinton Foundation. But the dollar found some support after the Fed’s FOMC said that the case for raising its fed funds rate continued to strengthen. This leaves the door open for a rate hike in December.

Upcoming events

Today’s key data release is US Non-Farm Payrolls. Investors will also be watching out for an update on the Unemployment Rate and Average Hourly Earnings. Before these we have Services PMIs from Spain, Italy, France, Germany and the Euro zone. Then Federal Reserve Vice-Chair Stanley Fischer takes part in a panel discussion on post-recession policy challenges after the market close.


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Posted by David Morrison

Category: AM Bulletin

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