Incisive market commentary from David Morrison

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AM Bulletin: Troubles at Deutsche rile investors
30 Sep 2016
AM Bulletin: OPEC “deal” sends oil soaring
29 Sep 2016
Video Update: Trouble at Deutsche Bank
28 Sep 2016
AM Bulletin: Banks lead equity rally
28 Sep 2016
PM Bulletin: USDJPY – set to break below 100?
27 Sep 2016
AM Bulletin: Equities rally after “Clinton win” in presidential debate
27 Sep 2016
Trading Guides: How margin works with spread betting
26 Sep 2016
Weekly Bulletin:Fed rate hike: postponed or cancelled?
26 Sep 2016
AM Bulletin: Equities dip after central bank-driven rally
23 Sep 2016
Video Update: FOMC keeps rates on hold
22 Sep 2016
AM Bulletin: Fed loses the (dot) plot
22 Sep 2016
PM Bulletin: FOMC in focus
21 Sep 2016
AM Bulletin: Mixed messages from BOJ
21 Sep 2016
PM Bulletin: BOJ look-ahead
20 Sep 2016
AM Bulletin: Stock indices swing on oil price
20 Sep 2016
Trading Guide:Fundamentals - Developing trading ideas
19 Sep 2016
Weekly Bulletin: All eyes on the Fed and BOJ
19 Sep 2016
PM Bulletin: Developed World Top Trumps
16 Sep 2016
AM Bulletin: Weak US data boosts equities
16 Sep 2016
Video Update: What to expect from the Fed
15 Sep 2016
AM Bulletin: US Retail Sales and BoE rate decision ahead
15 Sep 2016
PM Bulletin: The BoE and Beyond
14 Sep 2016
AM Bulletin: Investors nervous ahead of Fed meeting
14 Sep 2016
PM Bulletin: US stock indices coming under pressure
13 Sep 2016
AM Bulletin: Fed keeps us guessing
13 Sep 2016
Weekly Bulletin: Central banks remain in focus
12 Sep 2016
Trading Guides: How to make money spread betting
12 Sep 2016
Comparing major Central Banks
09 Sep 2016
AM Bulletin: ECB disappoints
09 Sep 2016
Video Update: Is the Fed really data-dependent
08 Sep 2016
AM Bulletin: ECB rate decision in focus
08 Sep 2016
Video Update: ECB Look- ahead
07 Sep 2016
AM Bulletin: Weak US data reduces likelihood of September hike
07 Sep 2016
PM Bulletin: EURUSD – still range bound
06 Sep 2016
AM Bulletin: Traders back after long US weekend
06 Sep 2016
Weekly Bulletin: Poor NFP suggests no September rate hike
05 Sep 2016
PM Bulletin: Non-Farm Payrolls disappoint
02 Sep 2016
Holiday Schedule: Labour Day, 5th September 2016
02 Sep 2016
AM Bulletin: All eyes on US Non-Farm Payrolls
02 Sep 2016
Video Update: Look-ahead to Friday's Non-Farm Payrolls
01 Sep 2016
AM Bulletin: Stock indices bounce back
01 Sep 2016
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Economic Outlook 

Just over a week ago investors got a loud “wake up” call after coasting through the summer. There was a sharp sell-off in global equity markets on fears that the US Federal Reserve may do the unthinkable and, horror of horrors, raise rates at its meeting this week. This followed a speech from Boston Federal Reserve President Eric Rosengren who is a voting member of the FOMC and renowned for his dovish views. Investors bought dollars and rushed to cut their exposure to bonds and equities after Dr Rosengren warned that the US economic recovery could be under threat if the central bank decided not to “continue on a path of gradual removal of accommodation.” But last Monday FOMC-voting member Lael Brainard stepped forward to urge caution when it came to tightening monetary policy. This helped to reverse some of the stock market sell-off although investors remain nervous.

The last time the Fed tightened monetary conditions was in December last year. That was when they took the decision to raise the fed funds rate by 25 basis points so taking the upper limit of its interest rate band to 0.50%. In addition, FOMC members predicted that there would be an additional 100 basis points-worth of tightening to come in 2016. This rate hike, together with the Fed’s forecast of more to come, led to a sell-off in equities and bonds. Since then the US central bank has found itself unable to tighten further. It has instead performed a balancing act in talking up the US economy while coming up with a myriad of reasons not to raise rates.

Yet the Fed knows it should be raising rates now as it needs to prepare for the next recession. At the same time it is terrified of making a move against a backdrop of an economy which isn’t exactly firing on all six. A rate hike now could risk sending the stock market into a nosedive just ahead of the US Presidential Election. The FOMC would like to wait until December. However, it runs the risk of the economy deteriorating further between now and then.

Typically, the US central bank cuts rates by around 5.5% when recessions hit. At current levels that implies a negative 5% interest rate. It’s interesting that much of the talk at last month’s Jackson Hole Economic Symposium was on the topic of negative interest rates. It’s also worth noting how central bankers appear remarkably relaxed about this bizarre state of affairs. And it is bizarre because this is the first time that the world has experienced negative interest rates in the whole history of money and banking.

According to the CME Group's FedWatch tool, market expectations for a Fed rate hike this week fell to 12% after Thursday's poor Retail Sales and Industrial Production numbers. The probability of a hike ticked up to 15% on Friday after inflation (as measured by CPI) came in higher than expected. But this still demonstrates that monetary tightening hasn’t been priced in to financial markets as the Fed has failed to give investors any clear guidance as to their thinking. But rate hike or no rate hike, this is a very important Fed meeting. The central bank also releases its Summary of Economic Projections which includes its infamous “Dot Plot” where FOMC members predict the path of future interest rate changes. On top of this, Janet Yellen holds a press conference after the rate decision is announced. The Fed Chair will have to be on her best form to explain either why the US economy isn’t strong enough to withstand a paltry 25 basis point hike, or why the central bank left investors unprepared for monetary tightening.

This week’s major economic releases include:


JPY Bank Holiday; EUR Current Account, German Bundesbank Monthly Report


AUD Monetary Policy Meeting Minutes, HPI; CHF Trade Balance; EUR German PPI, Long Term Refinancing Option; USD Building Permits, Housing Starts


AUD Mid-Year Economic and Fiscal Outlook; JPY BOJ Press Conference, Monetary Policy statement; GBP Public Sector Net Borrowing, BoE Quarterly bulletin; CHF SNB Quarterly Bulletin; USD Crude Oil Inventories, FOMC Statement, FOMC Economic Projections, FOMC Press Conference; NZD RBNZ Rate Statement


JPY Bank Holiday; EUR ECB Economic Bulletin; GBP FPC Statement, CBI Industrial Order Expectations; USD Weekly Jobless Claims, HPI, Consumer Confidence, Existing Home Sales, CB Leading Index


JPY Flash Manufacturing PMI, All Industries Activity; EUR French, German and Euro zone Flash Manufacturing and Services PMIs; CAD CPI, Retail Sales; USD Flash Manufacturing PMI.

 Equities Outlook

Eight years on from the demise of Lehman Brothers and the height of the Great Financial Crisis, global banks are back in focus, and yet again for all the wrong reasons.

At the end of last week it was reported that the US Department of Justice (DOJ) was seeking $14 billion from Deutsche Bank (DBK) to settle outstanding claims regarding Residential Mortgage-Backed Securities (RMBS). These claims relate to the issuance and underwriting of securities from 2005 to 2007 when the US housing bubble was underway. Deutsche Bank said that it had no intention of settling at anything like this level and would come in with a counter-offer. Analysts had anticipated a liability somewhere between $2 and $5 billion, closer to settlements made by Goldman Sachs ($5 billion), Citigroup ($7 billion) and Wells Fargo ($1.2 billion). However, back in 2014 Bank of America settled at $16.65 billion while in 2013 JP Morgan stumped up $13 billion. So there are a couple of precedents for large pay-outs.

Shares in Deutsche Bank fell sharply on the news, adding to the financial institution’s woes. In fact, Friday saw a significant decline across the whole European banking sector. It’s worth noting that Deutsche is the first European bank to enter into negotiations with the DOJ. Barclays, Credit Suisse, RBS and UBS all face similar difficulties when it comes to securitisation issues from earlier this century.

Meanwhile, US banking giant Wells Fargo (WFG) has difficulties of its own. Last week the bank was fined $185 million and was forced to pay back $5 million to its customers. The bank is accused of creating around 1.5 million deposit accounts and 560,000 credit card accounts which were unauthorised – in other words, not requested by customers. According to Dow Jones, Federal prosecutors are now conducting a probe which could lead to a criminal inquiry.

Commodity/ FX Outlook


Crude prices continued to come under selling pressure last week. On Friday WTI fell to its lowest level in over a month as a succession of bearish news items battered prices. It was interesting that there was very little talk about the output freeze which is due to be discussed by major producers later this month. Instead, investors reacted to a report from the International Energy Agency (IEA) which downgraded its forecasts for future global demand growth. The oil price was also hit by fresh US inventory data and the prospect of fresh supply hitting the market.

The IEA report said that there was evidence that global oil demand growth was set to decline at a faster rate than it had previously forecast. The IEA downgraded its forecast for demand growth for this year by 100,000 barrels to 1.3 million barrels per day (bpd). It said that growth momentum was set to ease further in 2017 to 1.2 million barrels per day. It also said that the decline in non-OPEC production had been offset by increased OPEC output – specifically from Saudi Arabia, Iraq and Iran. The IEA said that demand growth from China and India was “wobbling” while there were no gains from Europe and US momentum had “slowed dramatically." The agency said it expected supply to “continue to outpace demand at least through the first half of next year”.

On Wednesday oil suddenly spiked higher after the influential Energy Information Administration (EIA) released its latest update on US inventories for last week. This showed a crude drawdown of 600,000 barrels against an expected build of 2.8 million. However, the rally was short-lived and it wasn’t long before the oil price was once again heading lower. Looking beneath the report’s headline showed a distillate build of 4.6 million barrels (the biggest in eight months) and a gasoline build of 567,000 barrels (against an expected drawdown of 1.1 million barrels) which was the biggest in two months.

In other news, Iranian oil exports are nearing their pre-sanction levels while there are signs that output from Nigeria and Libya is picking up.


Gold fell steadily throughout last week. It fell through support around $1,320 and ended up trading back near the multi-month lows that it hit at the beginning of September. It is now threatening to test major support around $1,300. A break below here could see gold fall back towards $1,260 where it was trading just prior to the UK’s referendum on EU membership.

Silver seems to be doing a bit better than gold and spent last week trading either side of $19. There’s some mild support around $18.50/60 but a break below here opens up a potential downside move to retest support around $18.

As with everything else, what happens to these two precious metals depends on what happens at this week’s rate setting meetings from the US Federal Reserve and Bank of Japan (BOJ). Obviously, the Fed meeting is the more important of the two. However, gold and silver could find some support if the BOJ was to increase its programme of monetary stimulus.

Gold and silver sold off sharply ten days ago following a speech from FOMC-voting member Eric Rosengren. The Boston Fed President said that gradually tightening monetary policy was appropriate to maintaining full employment and that low interest rates increased the chances of the US economy overheating. Mr Rosengren is considered a dove, so his hawkish speech had considerable impact. But a few days later Lael Brainard (another voting member of the FOMC) helped to play down speculation of a rate hike this week. Dr Brainard said that it would be wise to keep US monetary policy loose due to global uncertainty and muted inflationary pressures. Gold is highly sensitive to rising US interest rates. Investors are happy to own precious metals in a low interest rate environment as their “lost opportunity” costs are low – they aren’t missing out on a yield elsewhere. But when interest rates are rising, precious metals become less attractive to hold.


Taken overall, last week saw relatively little movement in FX. Midway through Friday’s session it looked as if the dollar was set to close pretty much where it finished the week before. That was certainly the case when looking at the EURUSD and the Dollar Index (which is heavily-weighted towards the euro). However, the greenback rallied following the release of US CPI which came in better-than-expected. Investors decided that this raised the possibility of a Fed rate hike next week. That aside, last week brought some strengthening in the Japanese yen and some weakness in the British pound. Sterling had its worst session on Tuesday following the release of data which indicated that inflation (as measured by Core CPI) was rising by 1.3% year-on-year. This was unchanged from the previous month but a touch lower than the +1.4% expected. Investors interpreted this as strengthening the argument for further monetary easing from the Bank of England (BoE). The Bank’s MPC left rates unchanged on Thursday while upping their growth forecasts. Nevertheless, a majority of members on the MPC expect to cut further before the year-end. It would seem that the Bank’s credibility is steadily ebbing away under Mark Carney’s leadership.

Investors are gearing up for the two crucial central bank meetings which both take place over Tuesday and Wednesday this week (the Fed meeting is considered at the beginning of this report). The Bank of Japan (BOJ) will be first to release its monetary policy statement and hold a subsequent press conference. There has been a general expectation that the BOJ will announce plans for further monetary stimulus this week. This followed disappointment after the central bank’s last meeting at the end of July. Back then the BOJ kept its key interest rate unchanged which was pretty much as anticipated and increased its planned purchases of ETFs to 6 trillion yen (roughly $60 billion) from 3.3 trillion per annum. This was some way short of expectations as the market had been hoping for a monetary “shock and awe” programme to stand alongside the 28 trillion yen ($280 billion) fiscal stimulus that Prime Minister Shinzo Abe promised just two days before. The Japanese yen rallied on the disappointment, then rallied further once Mr Abe revealed details of his spending plans. Of that 28 trillion yen there was just 7.5 trillion ($74 billion) of new spending, and only 4.6 trillion earmarked for this year. Also, the apparent lack of coordination between the government’s stimulus and that from the central bank suggested that the “Helicopter Money” experiment which was so actively debated earlier in the year is unlikely to take place anytime soon.

Back in July BOJ Governor Haruhiko Kuroda said that the central bank would release details of a comprehensive assessment of its policies at this week’s meeting. Initially analysts thought that this would result in fresh stimulus. However, there are now concerns that the BOJ may decide that it has done as much as it can. This followed on from the ECB’s decision to hold off from making any changes to monetary policy following its own rate meeting earlier this month. But on Friday a Japanese Cabinet Office official said that Mr Kuroda would maintain ultra-loose monetary conditions to support the country's economic recovery. However, that doesn’t necessarily mean that the BOJ will announce further stimulus on Wednesday. And if it doesn’t, then there’s a good chance that the yen will strengthen again.


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Posted by David Morrison

Category: Weekly Bulletin

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