Incisive market commentary from David Morrison

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PM Bulletin: BOJ and the yen
31 May 2016
AM Bulletin: Quiet start following holiday weekend
31 May 2016
PM Bulletin: Meanwhile in China
27 May 2016
AM Bulletin: Yellen in focus ahead of holiday weekend
27 May 2016
PM Bulletin: FTSE breaks above 6,200 again
26 May 2016
Holiday Schedule: Memorial Day 30th May 2016
26 May 2016
AM Bulletin: Brent crude tops $50
26 May 2016
PM Bulletin : Crude Chart
25 May 2016
AM Bulletin: “Risk-on” trade continues
25 May 2016
PM Bulletin: Another poll boost for sterling
24 May 2016
AM Bulletin: Equities slip as rate hike worries persist
24 May 2016
PM Bulletin: Changing expectations
23 May 2016
Weekly Bulletin: I’ll see your hike and raise you two
23 May 2016
PM Bulletin : Significant events ahead of June FOMC
20 May 2016
AM Bulletin: Preparing for a summer rate hike
20 May 2016
PM Bulletin : Gold struggles as dollar strengthens
19 May 2016
AM Bulletin: FOMC more hawkish than anticipated
19 May 2016
PM Bulletin : FOMC minutes and the S&P
18 May 2016
AM Bulletin: FOMC minutes in focus
18 May 2016
PM Bulletin: Cable rallies on latest poll
17 May 2016
AM Bulletin: US equities lead bounce-back
17 May 2016
Weekly Bulletin : Waiting on Central Banks
13 May 2016
PM Bulletin : Apple
13 May 2016
Holiday Schedule Whit Monday Market Holiday
13 May 2016
AM Bulletin : US Retail Sales in focus
13 May 2016
PM Bulletin : Silver and Gold
12 May 2016
AM Bulletin: Investors wary after Wall Street sell-off
12 May 2016
PM Bulletin: Two headaches for Elon Musk
11 May 2016
AM Bulletin: Stock indices pull back after rally
11 May 2016
PM Bulletin: Yen pulls back on jawboning
10 May 2016
AM Bulletin: Markets steady on commodity bounce
10 May 2016
PM Bulletin: Precious metals give back recent gains
09 May 2016
Weekly Bulletin: Poor Non-Farm Payroll causes concern
09 May 2016
May: Non Farm Payrolls Out Today
06 May 2016
PM Bulletin: A dismal Non-Farm Payroll number
06 May 2016
AM Bulletin: Non-Farm Payrolls in focus
06 May 2016
PM Bulletin: Non-Farm Payroll look-ahead
05 May 2016
AM Bulletin: Crude bounce lifts equities
05 May 2016
PM Bulletin: Apple update
04 May 2016
AM Bulletin: Equities under pressure
04 May 2016
PM Bulletin: Aussie dollar slumps
03 May 2016
AM Bulletin: RBA cuts by 25 basis points
03 May 2016
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Economic Outlook  

Global stock indices have had a couple of bad weeks. The combination of a disappointing first quarter earnings season, a succession of poor economic data releases globally and general upset after the Bank of Japan decided against launching another raft of stimulus all combined to keep buyers at bay.

The BOJ decided to hold off from another round of stimulus just three months after adopting negative interest rates, on top of the unprecedented and open-ended QQE programme that has been running at its current level (equivalent to $60 billion of bond/ETF/REIT purchases per month) since October 2014. Nevertheless, BOJ Governor Haruhiko Kuroda sought to soften the blow by insisting that he saw no limits to monetary stimulus. Now the focus has turned to the next BOJ meeting in the middle of June. Investors are keeping the pressure piled on by bidding up the yen. Japanese policymakers are desperate to engineer a weaker currency, although their hands are tied somewhat by international agreements.

On Friday we had the latest US Non-Farm Payroll update. April Non-Farm Payrolls came in at 160,000 – the lowest figure for seven months.  The number was well below both the 203,000 consensus expectation and March’s reading of 208,000 which was revised down from 215,000. The Unemployment Rate came in at 5%. This was in line with expectations and unchanged from the previous month. It remains at the lower end of the band for the “natural rate of employment” which is estimated to be somewhere between 4.7% and 5.8%.

The Labour Force Participation Rate also fell. This shows how many Americans are counted in the unemployment data. If people get so discouraged that they stop looking for work then they’re not counted as unemployed. The number had picked up recently after years of decline suggesting that sentiment was improving and job seekers were returning to look for work. However it now looks as if the long-term downtrend may have resumed.

The weak data came on top of a disappointing Manufacturing PMI from the US, and poor Manufacturing and Services PMIs from China and the UK. The Euro zone’s was a bit of a mixed bag. The prior week we had a grim first quarter GDP number from the US. All-in-all, the poor data is a major concern when one considers the unprecedented waves of central bank monetary stimulus, together with zero (and now negative) interest rate policies adopted by developed countries. It also means that the chances of a June rate hike from the Fed are effectively zero.

This week’s major economic releases include:

Monday - EUR German Factory Orders, Sentix Investor Confidence, Eurogroup Meetings; CHF CPI

Tuesday - CNY CPI, PPI; CHF Unemployment Rate; EUR German Industrial Production, German Trade Balance; GBP Goods Trade Balance; USD NFIB Small Business Index, JOLTS Job Openings, Wholesale Inventories; NZD RBNZ Financial Stability Report

Wednesday - GBP Manufacturing Production, Industrial Production; USD Crude Oil Inventories, Federal Budget Balance
Thursday - JPY Current Account, BOJ Summary of Opinions, Economy Watchers Sentiment; EUR German Constitutional Court Ruling, Industrial Production; GBP Official Bank Rate, Monetary Policy Summary, BOE Inflation Report, BOE Gov Carney Speaks; USD Unemployment Claims, Import Prices; NZD Retail Sales

Friday -EUR German Prelim GDP, German Final CPI, Euro zone Flash GDP; USD Retail Sales, CPI, Consumer Sentiment, Inflation Expectations, Business Inventories

Saturday - CNY Industrial Production, Fixed Asset Investment, Retail Sales.

Equities Outlook

There are a number of sources for getting insight into how the US earnings season is working out. Thomson Reuters I/B/E/S provides a comprehensive dashboard and FactSet does an excellent weekly insight report. But I’ve taken this table from, simply because it’s the most up-to-date one I could find as well as the simplest to read. 

 For the first quarter, 374 companies out of 500 S&P constituents (74%) have reported so far. These show a combined decline of 2.7% in sales and 8.8% in earnings compared with the same period last year. If this continues for the rest of the season then it will mean that the S&P 500 will see four consecutive quarters of year-over-year declines in earnings since the period running from the fourth quarter of 2008 through to the third quarter of 2009. It will also mark the fifth consecutive decline in sales.

Despite this, around 75% of companies have reported earnings above the consensus estimates and 55% have reported sales above the consensus estimates (FactSet). This is because analysts have repeatedly revised their expectations downwards the closer we get to the actual earnings season. This is also the reason why the S&P500 is pretty much unchanged since the season began.

The big question now of course is: what next? After all, it could be that the worst is over and that corporations are lean, tight money-making machines ready to sell more products to grateful consumers at ever-fatter profit margins. That depends of course on the ability and willingness of consumers to spend, which in turn depends on consumer confidence. We can all take a guess at how that may go by looking at the economic data as it comes out. But what do the top people at the corporations themselves think? Again, according to FactSet, 36 companies have issued negative earnings-per-share guidance for the next quarter, while 18 have been positive. This means that 67% of companies that have given guidance have been negative, which is below the 5-year average of 73%. With the oil price depressed but off its lows and the dollar weaker than it was at the beginning of the year, it could be that the worst is over. Whether this manifests itself in a soaring S&P500 is another matter.

Commodity/ FX Outlook


On Friday Brent and WTI put in their first losing week in over a month. Both contracts had pushed higher throughout April and closed out at their best levels since the beginning of November last year. The rally took Brent briefly back above $48 per barrel and WTI to $46. But last week some profit-taking crept in. This was despite a sharp spike higher which began on Wednesday and carried through the early part of Thursday due to short-term supply concerns. The Canadian wildfire shut down a significant proportion of oil sands production while an increase in hostilities in Libya led to a rash of short-covering. Officials in the Libyan capital Tripoli warned that the country's output could fall by 120,000 barrels per day if tankers continue to be blocked. Meanwhile, residents of Fort McMurray (a city in the heart of Canada's oil sands) were evacuated as fire spread. Although production facilities are not directly in the fire's path, the blaze has disrupted operations in the area.

The sharp upward move in crude was unusual as it has been a long time since the oil market has paid any attention to what should be nothing more than a short-term hit to supply. The only other recent occasion was when Kuwaiti oil workers went on strike in April. However, the reaction of traders to the strike got muddled up in the shenanigans surrounding that farcical meeting in Doha. That was when the meeting between OPEC and non-OPEC producers to discuss an output freeze ended with no agreement and recriminations all round.

I think there were a couple of factors which played into last week’s sell-off in crude. Firstly (and perhaps less significantly) was the bounce-back in the US dollar. Typically, dollar-denominated commodities fall in price when the greenback rises as they become more expensive for buyers outside the US dollar bloc. However, there have been plenty of occasions when this inverse correlation hasn’t held, although it does tend to hold over a longer timeframe.

But I feel the second reason is that the longer-term trend in the oil price remains negative. I previously highlighted two areas that oil needed to breach convincingly for this trend to be over – $47/50 for Brent and $45/48 for WTI. The lower bounds were breached at the end of April but neither contract has so far been able to hold on above them.

Fundamentally, the medium to long-term outlook for supply and demand is paramount. Last month’s report from the International Energy Agency (IEA) noted that rebalancing was already taking place. The agency wrote that falling US production and a drop in output from other non-OPEC producers would help the oil market "move close to balance" in the latter half of 2016. But as the price of WTI moves above $45 US shale oil producers will take their previously unprofitable rigs out of mothballs. BP, ConocoPhillips, rig-owner Nabors Industries, explorer Pioneer Natural Resources and US shale giant Whiting Petroleum all said recently that a move above $50 will encourage more drilling or provide a much-needed boost to cash flow. No doubt the market will move ahead of this. US producers have been responsible for a big drop in production recently. Consequently it may prove difficult for crude to rise much further should US production pick up once again.  At the same time, OPEC producers will be anxious to cash in as well.

Gold/ Silver

Gold consolidated for most of last week after soaring the best part of 5% at the end of April. All-in-all, it was a solid performance for the yellow metal given the gains made in the previous month. Also, its losses were modest given downside pressures from a rising dollar. And this all held true even ahead of Friday’s Non-Farm Payroll release.

But then gold soared in the immediate aftermath of the data. Payrolls showed a rise of 160,000 which was well below the consensus expectation of around 200,000. The number took investors by surprise, even though it was foreshadowed by Wednesday’s weak ADP number and a reported rise in jobless claims and job cuts the day before. Gold (and silver) got an initial boost from a sell-off in the US dollar. But gold held on to a decent proportion of its gains even after the greenback bounced back. Silver had more of a struggle, but also managed to push higher.

Ultimately, the weak payroll number plays into the view that the Fed won’t hike rates again when it meets next month. If so, then precious metals will retain their allure as attractive assets to hold in a low-rate environment. After all, when it’s virtually impossible to earn any interest on cash or fixed income, why not diversify into precious metals as a safe haven?

Technically, gold and silver are running into resistance around $1,300 and $18 respectively. Support comes in around $1,260 and $17. 


On Tuesday last week the Dollar Index briefly broke below 92.00 to hit its lowest level since January 2015. But it subsequently put in a strong rally and even managed to weather a beating following Friday’s poor US Non-Farm Payroll number. Nevertheless, it remains below 94.00 – a level that has previously acted as support and can now be viewed as resistance. It’s difficult to know if the dollar’s recovery at the end of last week is simply a short-covering rally within the confines of an overriding downtrend, or the start of concerted move higher. In technical terms we’ll have to see if the Dollar Index can break back above 94.00 and if the EURUSD closes below 1.1400 for a number of consecutive sessions. Fundamentally, the recent poor run of US data (GDP, Manufacturing, Durable goods, consumer Confidence) severely reduces the likelihood of a June rate hike from the Fed. This should keep the downside pressure on the greenback, although this could be offset should further stimulus prove to be forthcoming from the BOJ (likely) or ECB (unlikely).

There was a valiant effort made to weaken the Japanese yen last week. But unfortunately it had little effect. The yen strengthened even after Japan’s Prime Minister Shinzo Abe suggested that measures could be taken to weaken the currency. Policymakers and the Bank of Japan (BOJ) have had to sit back and watch the currency surge around 12% against the US dollar since the end of January. This was when the BOJ took markets by surprise and adopted negative interest rates. The move should have made the yen less attractive. But instead it was driven higher as investors speculated that the BOJ was acting out of desperation and was close to reaching the limits of monetary easing.

The USDJPY broke back below 107.00 on Friday afternoon in the aftermath of the poor US payroll data. All the market chatter is that the Bank of Japan will hold back from intervening unless the USDJPY approaches 100.00 (that’s assuming it can get the OK from senior member of G20). But the danger is that speculators test the resolve of the central bank and use the next five weeks before the BOJ rate meeting to ramp the yen higher. 

*Prices are accurate at time of writing


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Posted by David Morrison

Category: Weekly Bulletin

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