Incisive market commentary from David Morrison

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Using the RSI in FX - Trading Guide
31 Jul 2017
HSBC share buy-back helps lift indices - AM Briefing
31 Jul 2017
Amazon triggers tech tumble - AM Briefing
28 Jul 2017
Fed reinforces dovish credentials - Video Update
27 Jul 2017
Facebook results boost NASDAQ - AM Briefing
27 Jul 2017
Crude breaks above resistance - PM Bulletin
26 Jul 2017
Equities rally on positive earnings - AM Briefing
26 Jul 2017
Look-ahead to tomorrow’s rate decision from the Fed
25 Jul 2017
Alphabet/Google falls 3% in after-hours trade
25 Jul 2017
Equities start the week on back-foot - AM Briefing
24 Jul 2017
Euro surges on “hawkish” comments from Draghi - AM Briefing
21 Jul 2017
Equities firmer ahead of ECB meeting - AM Briefing
20 Jul 2017
Europe firmer after late US rally - AM Briefing
19 Jul 2017
US Fed turns dovish - PM Bulletin
18 Jul 2017
Dollar slumps on US healthcare gridlock - AM Briefing
18 Jul 2017
Wall Street leads equity rally - AM Briefing
17 Jul 2017
US bank earnings in focus - AM Briefing
14 Jul 2017
Yellen flip-flops to reassure investors - AM Briefing
13 Jul 2017
Oil rallies, but volatility high - Video Update
12 Jul 2017
Yellen to testify in Washington - AM Briefing
12 Jul 2017
A look-ahead to Janet Yellen’s testimony - PM Bulletin
11 Jul 2017
Second quarter earnings in focus - AM Briefing
11 Jul 2017
Jobs data boost sentiment ahead of earnings - AM Briefing
10 Jul 2017
Investors nervous; Non-Farm Payrolls in focus - AM Briefing
07 Jul 2017
Non-Farm Payroll look-ahead - Video Update
06 Jul 2017
Investors shrug off FOMC minutes - AM Briefing
06 Jul 2017
Investors shrug off FOMC minutes - AM Briefing
06 Jul 2017
Look-ahead to FOMC minutes - Video Update
05 Jul 2017
Markets quiet and waiting for fresh guidance from US - AM Briefing
05 Jul 2017
Crude continues to push higher - PM Bulletin
04 Jul 2017
Dow closes at fresh record high - AM Briefing
04 Jul 2017
Positive start to second half of 2017 - AM Briefing
03 Jul 2017
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Early moves

Equities up as Fed turns dovish - again

China sells off on fears of fresh regulation

The major European stock indices were modestly higher first thing this morning, while the UK’s FTSE100 was up sharply. Investors responded to Friday night’s rally on Wall Street which came despite (or maybe because of) some indifferent bank earnings and weak data releases. Investors appear to be back in the “bad news is good” mind-set, triggered by Janet Yellen’s dovish testimony earlier last week. The Federal Reserve Chair indicated that the US central bank’s key fed funds interest rate may "not have to rise all that much further to get to a neutral policy stance." She also emphasised that the central bank remained data-dependent and was keeping a close eye on inflation when it came to monetary policy. Friday’s weak Retail Sales and flat CPI suggest that the Fed may be less ready to reduce stimulus in the second half of the year.

The Shanghai Composite ended 1.4% lower this morning despite the release of some strong Chinese economic data. GDP, Industrial Production, Retail Sales and Fixed Asset Investment all beat expectations. But investors had already dumped stocks on concerns that policymakers are looking to tighten up financial market regulation.

Stock Index Update

US banks fall despite decent earnings

Poor US economic data encourages bulls

European stock indices were mixed with a negative bias for most of Friday’s session. This was despite the US majors opening firmer following the release of earnings reports and economic data. Citigroup and JP Morgan both posted earnings and revenues which came in above consensus expectations. Yet both banks’ share prices sold off soon after the results were posted. Investors were disappointed after JP Morgan lowered its net interest income forecast for the year by around $500 million. Meanwhile Citigroup reported a year-on-year 5% reduction in its “Markets and Securities Services” due to a drop in equity sales. Wells Fargo beat its earnings forecast but fell short on revenues while PNC posted saw net interest income rise 9.2% which helped lift earnings to $2.10 per share - well above the $2.02 expected. All four banks were trading between 1.0% and 2.5% lower soon after the open, but recovered from their lows to end with modest losses.

Meanwhile, it really was a case of “bad news is good” as the expectations over the pace of further monetary tightening slowed sharply following the release of US inflation and retail sales data. Headline CPI came in unchanged for June. While this was slightly up on the prior month’s 0.1% decline, it was below the +0.1% forecast. Meanwhile Core CPI (excluding food and energy) was up 0.1% - unchanged from last month and again below expectations. The data showed that there is very little in the way of inflationary pressures in the US. Given Janet Yellen’s comments earlier in the week, this led investors to assume that the Fed could be set to slow down its pace of monetary tightening. Equities rallied as a result. It was a similar story for Retail Sales where both headline and core (excluding autos) fell 0.2% in June. This is further bad news for the US economy, yet apparently good for corporations. Stocks continue to reap the benefits of the easy money policies of the Federal Reserve and other developed world central banks.

Commodities Update

WTI/Brent shrug off negative news

Gold and silver end the week in positive territory

Last week’s US inventory reports from both the American Petroleum Institute (API) and Energy Information Administration (EIA) showed bigger-than-expected drawdowns in crude and gasoline and the news helped to support prices. But the EIA also reported that US production (chiefly from shale oil) had also risen. This news was overshadowed by the EIA modestly downgrading its overall US production forecast for next year to 9.9 million barrels per day from just over 10 million. But there is a concern that as investment pours into US energy companies, encouraging them to drill more, this increased production will continue to weigh on prices. Ultimately investors will get burnt if drillers can’t get paid enough for their output.

Last week the International Energy Agency (IEA) warned that the market could remain oversupplied for some time to come. On Wednesday OPEC reported that oil production rose again last month, driven by increases in Libya and Nigeria, Iraq and Angola.  On top of this Saudi Arabia pumped more than it agreed to last year and the cartel also predicts non-OPEC production growth will grow by 1.14 million barrels a day. OPEC also expects world oil demand growth to slow down slightly next year. Technically the situation is unclear. Crude oil made decent gains last week although both WTI and Brent are still some way below significant resistance. The 50% retracement of the May-June sell-off comes in around $47 and $49.70 for WTI and Brent respectively.

Gold and silver eked out gains last week but still look vulnerable to further selling. Nevertheless, both had a solid session on Friday and rallied sharply following the release of tepid US inflation data and weak Retail Sales. This followed on from Fed Chair Janet Yellen’s testimony in Washington when she assured policymakers that the central bank had a close eye on inflation when it came to monetary tightening. Friday’s data suggested that the Fed may be less ready to reduce stimulus in the second half of the year.

Both metals have had a torrid time of late as investors have relentlessly reduced their exposure to non-yielding assets. Gold and silver have both fallen sharply since mid-April as the US Federal Reserve made clear it was intent on “normalising” monetary policy by raising interest rates. This made the two precious metals unattractive to hold when investors could get paid a yield elsewhere. But this has been compounded by a decline in inflation as this means real rates (yield less inflation) are even more appealing. But Janet Yellen’s dovish testimony now suggests that the Fed is less anxious to tighten. In addition Dr Yellen said that the key fed funds interest rate may "not have to rise all that much further to get to a neutral policy stance."

Forex Update

US dollar continues to slide

Investors convinced Fed dovish again

The US dollar sold off sharply in the middle of last week following the release of a prepared speech from Federal Reserve Chair Janet Yellen. Dr Yellen was in Washington to testify before the House Financial Services Committee and the Senate Banking Committee. She used the occasion to correct the consensus expectation over the Fed’s thinking on future monetary tightening. Over the first half of this year (and certainly since June) it looked as if the Fed had turned from decidedly dovish to hawkish. The Fed raised rates by 25 basis points in December, March and June and indicated that it would continue to do so irrespective of a fall in inflation. In other words, it was no longer “data dependent” when it came to monetary policy. In addition, the Fed indicated it was preparing to reduce its balance sheet before the year-end. But last week Dr Yellen made it clear the central bank had a close eye on inflation and also that the fed funds rate was close to its neutral policy stance.

So the dollar continues to hover around a fourteen month low versus the euro and a ten month low when measured by the Dollar Index. Investors continue to favour the single currency as they consider the likelihood of the European Central Bank (ECB) starting to wind down its €60 billion per month bond purchase programme at the beginning of the New Year. ECB President Mario Draghi is expected to provide details over the reduction of monetary stimulus at the September rate setting meeting.

Upcoming events

Today’s significant events and economic data releases include the US Empire State Manufacturing Index.  


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Posted by David Morrison

Category: AM Bulletin

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