Incisive market commentary from David Morrison

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Weekly Bulletin: Equity rally continues
29 Feb 2016
PM Bulletin: Chart for the EURUSD
29 Feb 2016
AM Bulletin: Auction postponement linked to risk rally
26 Feb 2016
PM Bulletin: FOMC members add to confusion over monetary policy
26 Feb 2016
AM Bulletin: US stock indices rebound
25 Feb 2016
PM Bulletin: Lloyds Banking Group
25 Feb 2016
AM Bulletin: Stocks slip on lower crude
24 Feb 2016
PM Bulletin: Gold
24 Feb 2016
PM Bulletin: Crude oil, yen and equities
23 Feb 2016
AM Bulletin: Equities slip after strong start to week
23 Feb 2016
Sterling dumps on Brexit fears
22 Feb 2016
AM Bulletin: Stronger start for global equities
22 Feb 2016
AM Bulletin: Netflix leads Nasdaq lower
19 Feb 2016
PM Bulletin: FTSE revisited
18 Feb 2016
AM Bulletin: Oil still leading equities
18 Feb 2016
PM Bulletin: The yen, Nikkei and negative interest rates
17 Feb 2016
AM Bulletin: Oil and FOMC minutes in focus
17 Feb 2016
PM Bulletin: WTI and Brent
16 Feb 2016
AM Bulletin: Equities, USD, oil rally while precious metals slide
16 Feb 2016
Weekly Bulletin: Yellen keeps us guessing
15 Feb 2016
PM Bulletin: A multi-year look at the FTSE100
15 Feb 2016
PM Bulletin: Andrews’ Pitchfork on S&P500
12 Feb 2016
AM Bulletin: Equities remain vulnerable to further selling
12 Feb 2016
PM Bulletin: EURUSD – what now?
11 Feb 2016
AM Bulletin: Yellen fails to calm nerves
11 Feb 2016
PM Bulletin: Yellen steers through Clashing Rocks
10 Feb 2016
AM Bulletin: Yellen testimony in focus
10 Feb 2016
PM Bulletin: Japanese sell-off spooks investors
09 Feb 2016
AM Bulletin: Investors nervous as crude flirts with $30
09 Feb 2016
PM Bulletin: Big “risk-off” moves to start the week
08 Feb 2016
Weekly Bulletin: Investor jitters raises volatility
08 Feb 2016
February: Non Farm Payrolls Out Today
05 Feb 2016
PM Bulletin: Big miss for Non-Farm Payrolls
05 Feb 2016
AM Bulletin: Non-Farm Friday
05 Feb 2016
PM Bulletin: Non-Farm Payroll look-ahead
04 Feb 2016
AM Bulletin: Dollar slumps; oil spikes
04 Feb 2016
PM Bulletin: Tomorrow’s MPC press conference in focus
03 Feb 2016
AM Bulletin: Weaker crude weighs on equities
03 Feb 2016
PM Bulletin: A look at the EURUSD
02 Feb 2016
AM Bulletin: Google can’t lift indices
02 Feb 2016
PM Bulletin: Charts for USDJPY
01 Feb 2016
Weekly Bulletin: Central banks respond to sell-off
01 Feb 2016
Expand January <span class='blogcount'>(39)</span>January (39)


Week Ahead: Monday 1st – Friday 5th February

Economic Outlook 

Amid the continued unsettling market conditions that kicked off in January we’ve now had some input from the major central banks. The biggest surprise came on Friday when the Bank of Japan (BOJ) took interest rates negative for the first time in its history. From 16th February it will apply a rate of minus 0.1% to excess reserves lodged at the central bank. Like the ECB’s negative Deposit Rate for Euro zone banks, the move is designed to persuade financial institutions to seek out higher yields by lending to businesses and individuals and thereby boost growth and inflation. The BOJ kept its program to buy government bonds and exchange traded funds unchanged at 80 trillion ($670 billion) yen per annum. However, bank officials made it clear that they were prepared to provide further stimulus if necessary.

On Wednesday the US Federal Reserve delivered its first FOMC statement since it hiked rates back in mid-December. There were two main points that were worth considering. Firstly, there was this change in the opening sentence. December’s statement started with “Information received since the FOMC met in October suggests that economic activity has been expanding at a moderate pace.”

This was changed to “Information received….suggests that labour market conditions improved even as economic growth slowed late last year.” So, the FOMC has alluded to better non-Farm Payroll data but has explicitly acknowledged that economic growth slowed down. I suppose this is the closest we’ll come to having an admission that December’s rate hike was a mistake.

At the end of the second paragraph the FOMC added the following: “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labour market and inflation, and for the balance of risks to the outlook.”

This is the closest we got to the FOMC saying that they’re dialling down their projections for future rate hikes. But a look at the fed funds futures market suggests a much slower rate of tightening over the year. Certainly, the US dollar (as measured by the Dollar Index) is little-changed since the beginning of the year and the EURUSD is some way off its December lows. It also means that they will consider market turmoil when next deciding to hike rates or not. I’m not quite sure how this is covered in their dual mandate to ensure maximum employment and price stability (inflation).

Last week European Central Bank president Mario Draghi said the bank will "review and possibly reconsider" monetary policy at its next meeting in March. He also reiterated that there would be "no limits" to action to reflate the Euro zone.

Amid all the noise coming out of central banks, it is worth considering what Axel Weber said at the World Economic Forum in Davos. The chairman of UBS AG and ex-president of the Deutsche Bundesbank and European Central Bank Governing Council member declared that “there is a very clear limit to what QE can and will achieve. The problem is that monetary policy has largely run its course.”

Despite Herr Weber’s concerns there’s a feeling that central banks still have investors’ interests in mind and stand ready to intervene to shore up financial markets. But the fear is that we’re getting diminishing returns from every intervention. Not only that, but eight years on from the crest of the financial tsunami, we’re still reliant on unprecedented central bank stimulus to produce tepid growth and keep us from sliding back in to recession – which will surely come.

This week’s major economic releases include:

Monday - CNY Manufacturing PMI, Non-Manufacturing PMI, Caixin Manufacturing PMI; EUR Spanish Manufacturing PMI, Italian Manufacturing PMI, French Final Manufacturing PMI, German Final Manufacturing PMI; GBP Manufacturing PMI, Net Lending to Individuals; USD Core PCE Price Index, Personal Spending, Personal Income, ISM Manufacturing.

Tuesday - AUD Cash Rate, RBA Rate Statement; EUR Spanish Unemployment Change, German Unemployment Change; GBP Construction PMI; USD Total Vehicle Sales

Wednesday - AUD Building Approvals, Trade Balance; CNY Caixin Services; EUR Spanish, Italian, French, German, Euro zone Services, Retail Sales; GBP Services PMI; USD ADP Non-Farm Employment Change, ISM Non-Manufacturing PMI, Crude Oil Inventories

Thursday  - GBP BOE Inflation Report, Official Bank Rate, Monetary Policy Summary; USD Unemployment Claims, Factory Orders

Friday  - AUD Monetary Policy Statement, Retail Sales; EUR German Factory Orders; USD Non-Farm Payrolls, Average Hourly Earnings, Unemployment Rate, Trade Balance

Equities Outlook

We’re getting further into the fourth quarter earnings season now which has been mixed so far. It is probably too early to find a discernible trend but it is worth considering how investors reacted to results from some key corporations. As far as the FANG (Facebook, Amazon, Netflix and Google) stocks are concerned, Facebook’s numbers were superb and Amazon’s were dreadful. Netflix was disappointing and Alphabet (Google) reports on Monday 1st February.

The FANG stocks have been responsible for supporting the broader market for the last eight months or so. But now things could be changing. Since the end of the year up until Friday’s open Alphabet is down 3.5% while Facebook is up 3.7%. But Amazon is down 17% and Netflix has lost 19%. All-in-all, not the most auspicious of starts.

Looking at the broader picture, the S&P500 is down about 7% so far this year and 11% since hitting its all-time record high back in May last year. A number of analysts have suggested that we’re at the beginning of a serious and protracted bear market, or possibly a crash as we saw between 2007 and 2009. Others argue that this is nothing more than a correction, much as we saw back in 2011/12 or even just a repeat of the China-inspired sell-off back in August. It’s difficult to tell at this stage.

There are plenty of reasons to worry about the state of the market. The situation may look a bit brighter now than it did even a week ago. Nevertheless, central bank intervention cannot be a panacea for all the ills of the financial markets. It is far from certain that the sell-off in commodities and oil is over yet. Also, stocks are cheaper now than they were at the end of December, but that doesn’t mean they aren’t still overpriced. In addition, it does feel as if the US Federal Reserve made a big mistake when it hiked rates last month, particularly if the US dollar gets back on the rally track. Not only does a strong dollar hurt US multinationals, it is also a real concern to those emerging economies that hold large dollar-denominated debts. There are severe problems in the high yield (junk) bond market (exacerbated by the dollar and oil) and there continues to be too much debt in both the private and public sectors in developed countries. The lack of inflation and low growth mean that this will be difficult to service, repay or refinance.

Central bank intervention is perhaps the only thing preventing asset prices from a deeper correction and consequently it is preventing the markets from functioning properly. What was it that Axel Weber said again? 

Commodity/ FX Outlook


Oil had a good week to end the month.  Crude prices were supported by central bank rhetoric and action, going back to the previous week when the ECB released a dovish statement. Mario Draghi  suggested that the bank was prepared to ease monetary policy further which means there’s a high likelihood of disappointment come March. But that it some way off. For now the ECB President can congratulate himself for a successful bout of jawboning which has taken some pressure off the oil market. But he wasn’t acting alone. Last Wednesday the FOMC released a relatively dovish statement while on Friday the Bank of Japan went a step beyond windy rhetoric and actually loosened monetary policy. All this was good for oil. And what is good for oil is good for bonds and equities.

Aside from the central banks, there were other factors which helped to lift crude further away from that crucial $30 per barrel level. Despite a sharp dollar rally on Friday the EURUSD is still a long way from parity. Additionally, crude was boosted by a story from Reuters on Thursday that Saudi Arabia had made a proposal that OPEC members cut production by as much as 5%. This led to a buying surge which was exacerbated by short-covering. However, other news sources toned down the scoop writing that Saudi “may” make such a proposal. Crude oil pulled back from its best levels but looks set to close out the week comfortably above $30 per barrel, which is the “line in the sand” as far as equity traders are concerned.

Nevertheless, the fundamental outlook hasn’t changed. Supply continues to exceed demand by a wide margin and this looks set to continue at least for the first half of this year.


Interest in gold has picked up recently. This is unsurprising given the turmoil in financial markets we’ve experienced since New Year. The rally may putter out just as it did at the end of last summer following the previous round of China-driven chaos. If that were the case, then we could see gold head back to $1,000 per ounce or below. Alternatively, growing financial and geopolitical uncertainty (China, the Middle East, oil, the US Presidential Election, UK Referendum for starters) could mean the lows are already in.

Gold and silver should both be getting plenty of support from central bank actions and rhetoric. ECB President Mario Draghi has said the bank will "review and possibly reconsider" monetary policy at its next meeting in March. He also reiterated that there would be "no limits" to action to reflate the Euro zone. Last Wednesday the US Federal Reserve’s FOMC delivered a relatively dovish statement. The Committee gave no suggestion that was tuning down its projections for a full 1%-worth of rate hikes for the rest of 2016. But a look at the fed funds futures market suggests a much slower rate of tightening. Then the Bank of Japan (BOJ) took interest rates negative for the first time in its history. The move is designed to persuade financial institutions to seek out higher yields by lending to businesses and individuals and thereby boost growth and inflation. Additionally bank officials made it clear that they were prepared to provide further stimulus if necessary.

Despite all this central bank dovishness, gold looks like ending the week below recent highs. It shot up straight after the release of the FOMC statement coming within a whisker of $1,128. It pulled back subsequently. But on Friday afternoon it was hovering just below its 200-day moving average near $1,120. This was despite a sharp rally in the US dollar.

It doesn’t feel as if gold is about to take off as it did back in 2009. That was when central banks cut rates to the bone (so it seemed) and launched wave upon wave of quantitative easing. But those same central banks still have balance sheets choc-a-bloc with all manner of debt instruments. And in the case of the ECB and BOJ these could expand further. Who knows what would happen to the gold price if the Fed signalled a slower rate of tightening, or (whisper it) reversed their rate hike?


It was another week of volatility in currency markets. Once again commodity currencies like the Canadian dollar and Norwegian krone ebbed and flowed on the back of movements in the oil price. Ultimately both ended higher as oil rallied for the second successive week and pulled further away from $30 per barrel.

Friday saw some particularly sharp movements for a number of FX pairs. Overnight the Japanese yen and Swiss franc both plunged following the Bank of Japan’s surprise decision to take interest rates negative. Both currencies are considered “safe havens” – currencies that investors head into when they are feeling nervous. So when risk appetite increases, investors sell (borrow) low yielders such as the franc and yen and put the proceeds back to work in higher yielding and riskier instruments such as equities. Investors were completely wrong-footed by news of the Japanese rate cut. Just one week earlier BOJ Governor Haruhiko Kuroda told Reuters that he had “no plan to adopt negative rates now.”

So was this just a question of keeping investors on their toes (which shouldn’t be an aim of a central banker) or had the economic situation changed dramatically? had an alternative explanation:” … the BOJ, just like the Fed which admitted one week ago it hikes rates just as the economy was slowing, has demonstrated it has absolutely no clue either what it is doing, and certainly no idea how to properly communicate with the markets.” Sounds about right to me.

Meanwhile, also on Friday, the US dollar soared. It made gains against all the majors as once again investors focused on the divergent monetary policies of the US Federal Reserve (who have just raised rates) and everyone else who seem determined to pile on more stimuli. US Advanced GDP for the fourth quarter came in at +0.7% annualised.  This was a touch below expectations, but the greenback soared nevertheless. It carried on rallying after the Chicago PMI came in at 55.6 – miles above last month’s 42.9 (seven-year low) reading. 


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Posted by David Morrison

Category: Weekly Bulletin

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