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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Week Ahead: Monday 12th – Friday 16th September

Economic Outlook 

Last week the European Central bank (ECB) held off from easing monetary policy further. The central bank kept its three key interest rates unchanged and decided against increasing its Asset Purchase Programme (APP) in either size or duration. In fact, according to ECB President Mario Draghi, the APP wasn’t even discussed by the Governing Council. So it remains at €80 billion per month and will run “through March 2017 or beyond if needed.” The ECB didn’t rule out further stimulus in the future. But they didn’t see much that had changed since their previous meeting with respect to the outlook for growth and inflation. Indeed, the Governing Council came up with a modest revision for its GDP growth forecast for 2016 – up to 1.7% from 1.6%, while lowering their 2016 and 2017 forecasts to 1.6% from 1.7% for both years. As far as their inflation outlook was concerned, the Council still expects its Core CPI measure to come in below its 2% target for at least five years. Their current forecast for inflation this year is just +0.2%.

So, what’s holding the ECB back from announcing further stimulus? Probably the concern that it isn’t doing what it’s supposed to do. The ECB launched its own version of quantitative easing (QE) back in March 2015. Since then it has extended the duration of the programme twice and increased the size of its bond purchases to €80 billion per month from €60 billion. The current QE programme is set to pump €1.7 trillion into the Euro zone economy, up from €1 trillion initially. Yet still the central bank has been unable to boost growth or cause inflation. Japan is undoubtedly the poster-child when it comes to central bank intervention. The country’s economy has been moribund for over a quarter of a century. This is despite the efforts of the Bank of Japan (BOJ) which has unleashed wave after wave of monetary stimulus at the financial system. Not only has this failed to kick-start the Japanese economy, but there are signs of its negative impact. Back in January the BOJ surprised markets when it suddenly adopted negative interest rates. This should have weakened the yen substantially, but it had the opposite effect. It can be no surprise then that central bankers are becoming more desperate in their appeals to policymakers for fiscal stimulus and structural reform.

This week’s major economic releases include:


EUR Italian Quarterly Unemployment Rate; GBP CB Leading Index


AUD NAB Business Confidence; CNY Industrial Production, Fixed Asset Investment, Retail Sales; EUR German Final CPI, Italian Industrial Production, German ZEW Economic Sentiment, Euro zone ZEW Economic Sentiment, Euro zone Employment Change; USD Federal Budget Balance


AUD Mid-Year Economic and Fiscal Outlook; GBP Claimant Count Change, Unemployment Rate, Average Earnings Index, Inflation Report Hearings; USD Import Prices, Crude Oil Inventories; NZD GDP


CNY Bank Holiday; AUD Unemployment Rate; CHF SNB Monetary Policy Assessment; GBP Retail Sales, MPC Official Bank Rate, MPC Monetary Policy Summary; USD Retail Sales, Philly Fed Manufacturing Index, PPI, Unemployment Claims, Current Account, Empire State Manufacturing Index, Capacity Utilization Rate, Industrial Production, Business Inventories


CNY Bank Holiday; CAD Manufacturing Sales, Foreign Securities Purchases; USD CPI, Consumer Sentiment, Inflation Expectations

 Equities Outlook

Last week’s US Labor (sic) Day holiday unofficially marked the end of the summer. This week we can expect trading desks to be back to full strength as we get further in to the final month of the third quarter. We have another four weeks to go before the next US earnings season kicks off. But before then we have a rash of central bank meetings to consider.

We already know that the European Central bank (ECB) has delayed launching fresh stimulus. The ECB left the door open for some form of monetary easing before the year-end so that means there are two meetings (20th October and then 8th December) when something could happen. In the meantime, the Euro zone will have to struggle on with inflation set to come in around +0.2% in 2016 (well below the ECB’s 2% target) and tepid GDP growth.

This week the Bank of England’s Monetary Policy Committee (MPC) holds its first rate setting meeting since early August. Back then the MPC halved its headline Bank Rate to 0.25% - the first time it changed its interest rate since the nadir of the financial crisis in March 2009. The Committee also voted to increase its Asset Purchase Facility by £60 billion and said it would start buying up corporate bonds. In its statement the MPC said that it was taking these measures to counteract the negative effects of the UK’s Brexit vote. However, Governor Carney and his team have been accused of acting precipitously as economic data released since then (principally Manufacturing, Services and Construction PMIs) have all been strong. Consequently it seems most unlikely that the Bank will make any change to its monetary policy this time round.

Looking ahead, there are key meetings from the US Federal Reserve and Bank of Japan over the 20th and 21st September. What happens at these will be crucial in influencing how global stock markets behave between now and year-end. Considering the major US indices, the Dow Jones Industrials, S&P500 and NASDAQ 100 all hit fresh record highs in August. However, all three have traded in relatively tight ranges since the middle of July. Equities remain in favour as investors continue to search out a return on capital in a low-yield world. The dividend return on the S&P500 is around 2% which seems attractive when government bonds pay so little. However, barring outright default, investors get their money back at the end of a bond’s life – unless, of course, they bought it with a negative yield in which case they get back a bit less. But there is no guarantee with a company’s stock. After all, corporations do go bust – even high profile ones. Remember Enron? Not only that, but corporations can cut their dividends making them less attractive for fund managers desperate for yield. This is why the prospect of a Federal Reserve rate hike is potentially damaging for equities. If the Fed tightens monetary policy now, investors may feel they can get a less risky return outside of the stock market - particularly with corporate earnings so weak.

Commodity/ FX Outlook


Crude oil few higher for most of last week. The initial trigger for the rally was the August Non-Farm Payroll release from 2nd September. This undershot expectations and led to a sharp sell-off in the US dollar. Investors had to quickly reassess the odds on a September rate hike from the US Federal Reserve. The weaker-than-expected number reduced to probability of a rate rise later this month. Bear in mind that market participants had decided that a September hike was a distinct possibility following Fed Chair Janet Yellen’s speech at the Jackson Hole Economic Symposium at the end of August. Back then she said that the case for a Fed rate hike had strengthened recently. Following this, Federal Reserve Vice Chair Stanley Fischer stated that her speech was entirely consistent with two rate hikes for the rest of this year. So the weak Non-Farm Payroll data turned this all around sharply.

But the oil market responds to any old dog whistle. If it’s not inventory data then it’s talk of a production freeze. The thing is that once prices start moving in a particular direction they move very quickly. This is a function of the highly speculative nature of the market. WTI and Brent had both rallied around 9% in the first week of September. Both bounced off the 61.8% Fibonacci Retracement of the rally in the first few weeks of August. Now the upside targets are the August highs - $51.20 for front-month Brent and $49.30 for WTI. A failure to take out these levels could see the oil price reverse sharply.

At the end of last week Russia’s news agency Tass reported that Russian Oil Minister Alexander Novak had ruled out an oil output freeze being on the agenda at the Algeria meeting later this month. But this hardly matters any more as far as far as the long-term outlook for the oil price is concerned. We can expect a load of claims and counter claims about what will be discussed and who will be there to discuss it in the lead-up to the meeting which takes place from the 26th to 28th September.

In the meantime it’s worth remembering that the world’s major oil producers Saudi Arabia, Russia, Iran and Iraq are all pumping out as much product as they possibly can. On top of this, there’s evidence that US shale oil producers are also increasing production. Just over a week ago the CEO of Pioneer Drilling, Scott Sheffield, said that oil wells in the biggest US oil fields remain profitable even with crude prices below $30 a barrel. And one thing is for sure, the US definitely won’t be talking to anyone about freezing production. So, if OPEC members and Russia agree to freeze output and this leads to a further run-up in the oil price, it just means that it gives the green light for US shale oil producers to ramp up output. Not only will this fly in the face of the Saudi’s attempt to put US shale producers out of business, it also implies that there’s a cap on crude prices.

Last week the EIA raised its forecast for 2017 US crude output to 8.51 million barrels per day from 8.31 million barrels previously. Meanwhile, the outlook for demand growth is uncertain. GDP for the US and Euro zone is tepid while China’s economic growth continues to moderate. Given this, it seems unlikely that there will be any significant upgrades to global oil demand growth anytime soon.


As usual, last week the gold price (and silver’s to a lesser degree) ebbed and flowed inversely to movements in the US dollar. This relationship is common to all dollar-denominated commodities to some extent. The most common reason given is that a stronger dollar means that it’s more expensive for non-dollar holders to convert their currency to purchase the dollars needed to buy these commodities. In addition, the dollar typically gains when there’s an expectation that US interest rates will rise relative to others. In this situation precious metals lose some of their appeal to investors. This is because they don’t earn an income (equities typically pay a dividend, while bonds generally pay interest). 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.

Gold’s big upside move last week followed the release of the US ISM Non-Manufacturing PMI. This fell sharply to 51.4 in August from 55.5 in the previous month. This was also well below the 55.4 survey reading anticipated. The decline in this services component of the ISM report followed on from a disappointing Manufacturing PMI the week before. The latter registered contraction in August, as it fell to 49.4 after a reading of 52.6 in July. The weak data added to fears that the US economic recovery is slowing. The August Non-Farm Payroll number came in well below the consensus expectation while the first revision to second quarter GDP weakened to just 1.1% annualised. With inflation as measured by Core PCE still well below the Fed’s 2% target, and with Janet Yellen reiterating the point that the US central bank is “data dependent” when it comes to deciding monetary policy, the probability of a September rate hike appeared to be declining.

However, gold and silver sold off again on Friday afternoon 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.


The US dollar rallied sharply on Friday but still ended lower for the week. Most of the damage was done on Tuesday following the release of the latest US ISM Non-Manufacturing PMI. The August index fell sharply, coming in at 51.4 on expectations of a reading of 55.4, and was well below the prior month’s reading of 55.5.

This weak Non-Manufacturing report followed on from a disappointing ISM Manufacturing PMI the week before. The August manufacturing survey registered contraction in the sector as it fell to 49.4 from 52.6 in July. The weak data added to fears that the US economic recovery is slowing as it came on top of a weak Non-Farm Payroll report and a disappointing second quarter GDP number. With inflation as measured by Core PCE still well below the Fed’s 2% target, and with Janet Yellen reiterating the point that the US central bank is “data dependent” when it comes to deciding monetary policy, the probability of a September rate hike appeared to be declining. However, it would be a mistake to underestimate the determination of the Federal Reserve when it comes to talking up the US economy. The central bank is desperate to push interest rates up from current levels so that it has “ammunition” to deal with the next recession, whenever that may be. At the same time, the Fed is terrified of hiking rates 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. So, just to make sure that investors keep the Fed’s September meeting “live” for a rate rise, on Friday we got a hawkish 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 some impact. The US dollar stormed higher. Unfortunately, the US stock market didn’t. Ironically, if the sell-off in equities continues this week then that could bury the idea of a rate hike this month once and for all. 


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Posted by David Morrison

Category: Weekly Bulletin

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