Incisive market commentary from David Morrison

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AM Bulletin: Equities and oil slip in early trade
31 Mar 2016
PM Bulletin: Non-Farm Payroll look-ahead
31 Mar 2016
AM Bulletin: Yellen comments boost risk appetite
30 Mar 2016
PM Bulletin: Is a dovish Janet really that bullish?
30 Mar 2016
AM Bulletin: Yellen to speak
29 Mar 2016
PM Bulletin: US indices running into resistance
29 Mar 2016
AM Bulletin: Profit-taking ahead of holiday weekend
24 Mar 2016
PM Bulletin: Dollar correlations
24 Mar 2016
AM Bulletin: Equities head higher
23 Mar 2016
PM Bulletin: Melt-down in precious metals
23 Mar 2016
AM Bulletin: Markets looking for guidance
22 Mar 2016
Weekly Bulletin: US dollar on the back foot
21 Mar 2016
AM Bulletin: USD sell-off boosts oil
18 Mar 2016
PM Bulletin: A look at the S&P500 and FTSE100
18 Mar 2016
AM Bulletin: USD down on dovish Fed
17 Mar 2016
PM Bulletin: USDJPY
17 Mar 2016
AM Bulletin: All ears and eyes on FOMC
16 Mar 2016
PM Bulletin: Reaction to the “Sugar Tax”
16 Mar 2016
AM Bulletin: BOJ unchanged
15 Mar 2016
PM Bulletin: FOMC look-ahead and the USD
15 Mar 2016
Weekly Bulletin: Central banks still in focus
14 Mar 2016
PM Bulletin: Gold
14 Mar 2016
AM Bulletin: Confusion reins
11 Mar 2016
PM Bulletin: EURUSD revisited
11 Mar 2016
AM Bulletin: ECB meeting in focus
10 Mar 2016
PM Bulletin: Mr Draghi fires his bazooka
10 Mar 2016
AM Bulletin: Markets consolidate
09 Mar 2016
PM Bulletin: ECB look-ahead
09 Mar 2016
AM Bulletin: Chinese data weighs on equities
08 Mar 2016
PM Bulletin: Nasdaq 100
08 Mar 2016
Weekly Bulletin: ECB expected to boost stimulus
07 Mar 2016
PM Bulletin: FTSE making steady gains
07 Mar 2016
March: Non Farm Payrolls Out Today
04 Mar 2016
AM Bulletin: Markets quiet ahead of Non-Farms
04 Mar 2016
PM Bulletin: Meanwhile, over in silver...
04 Mar 2016
AM Bulletin: Equities consolidate
03 Mar 2016
PM Bulletin: Non-Farm Payroll look-ahead
03 Mar 2016
AM Bulletin: Equities soar
02 Mar 2016
PM Bulletin: AUDUSD chart
02 Mar 2016
AM Bulletin: See-saw day ends in losses for US equities
01 Mar 2016
PM Bulletin: Glencore
01 Mar 2016
Expand February <span class='blogcount'>(42)</span>February (42)
Expand January <span class='blogcount'>(39)</span>January (39)


Week Ahead: Monday 7th March – Friday 11th March

Economic Outlook  

Friday’s Non-Farm Payroll number blasted past the consensus estimate coming in at 242,000 on expectations of an increase of 195,000. The dollar jumped along with US stock index futures while gold sold off after a solid morning.

On the face of it, this was yet more evidence of improvement in the US economy. The unemployment rate was unchanged at 4.9%, but nevertheless, this is one part of the Fed’s dual mandate which is being fulfilled. However, Average Hourly Earnings dropped by 0.1% month-on-month, down from +0.5% last time. This is disappointing as far as US workers are concerned, although it does suggest less upside inflationary pressures.

The initial market reaction suggested that investors saw a definite improvement in the US economic outlook, but not yet enough to justify a further rate hike this month. But if members of the FOMC suggest that we could see further tightening in March (two are set to give speeches this afternoon), we could see a sudden loss of risk appetite.

In other news, the European Central Bank (ECB) will deliver its latest rate decision on Thursday. The central bank is expected to keep its headline Minimum Bid Rate unchanged at 0.05%, where it has been for the past year and a half. However, it is also expected to announce further stimulus measures.

At the central bank’s last monetary policy meeting in January ECB President Mario Draghi said that the Governing Council would review and possibly reconsider its stimulus program at this March meeting. Low inflation and tepid growth continue to weigh, and since then Euro zone CPI has dropped back into negative territory, raising fears that deflationary pressures are once again taking hold across the area.

The question is what form this additional stimulus may take?  Another cut in the deposit rate is possible. This is the rate that the ECB charges financial institutions for lodging funds with them overnight. By making this an unattractive proposition, the ECB hopes that such funds will flow back into the economy as banks and others look to get a higher (but riskier) return elsewhere. But another cut will put further stress on Euro zone banks as lending/borrowing margins are compressed. This won’t be good news for a sector which is currently experiencing difficulties.

At the ECB’s meeting in early December Mr Draghi announced an extension of the central bank’s quantitative easing programme. He said that this would now run until March 2017 at the earliest (previously it was due to end in September this year). However, there was widespread disappointment that the Governing Council failed to increase the size of its bond purchases from the current €60 billion per month. This led to a sharp rally in the euro which was only checked when the very next day Mr Draghi insisted that: “There is no particular limit to how we can deploy any of our tools,” and: “There is no doubt that if we had to intensify the use of our instruments to ensure that we achieve our price stability mandate, we would.”

So there are high expectations placed on the ECB this week. The consensus expectation is that the bond purchase programme will become open-ended, and that it will be increased by around €20 billion per month. If Mr Draghi falls short on this, maybe due to resistance from other members of the Governing Council, then we can expect a sharp rally in the euro and a swift sell-off in equities. Quantitative easing may be proving to be increasingly ineffective, but empty rhetoric is even worse as far as the markets are concerned.

This week’s major economic releases include:

Monday - EUR German Factory Orders, Sentix Investor Confidence, Eurogroup Meetings; USD FOMC Member Brainard Speaks, FOMC Member Fischer Speaks; JPY Final GDP, Current Account

Tuesday - AUD NAB Business Confidence; CNY Trade Balance; EUR German Industrial Production, Euro zone Revised GDP, ECOFIN Meetings

Wednesday - AUD Home Loans; GBP Manufacturing Production, Industrial Production; CAD BOC Rate Statement; USD Crude Oil Inventories; NZD RBNZ Rate Statement

Thursday - CNY CPI, PPI, New Loans; EUR ECB Minimum Bid Rate, ECB Press Conference; USD Federal Budget Balance

Friday - EUR German Final CPI, Italian Industrial Production; GBP Trade Balance, Construction Output, Consumer Inflation Expectations; CAD Unemployment Rate; USD Import Prices, Consumer Sentiment, Inflation Expectations

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

Equities Outlook

At the beginning of last week global equity markets continued to build on the gains made since 11th February. This was when Federal Reserve Chairman Janet Yellen testified in Washington, pouring oil on the troubled waters that had battered financial markets since the beginning of the year. She suggested that despite justifiable concerns over the global outlook, the pessimism was overdone. The US economy was improving, but the Fed would be cautious when it came to future monetary tightening.

So investors took this as a green light to load back up on equities, particularly those worst hit since the beginning of the year. The mining and banking sectors have both done well since Mrs Yellen’s comments as have oil and energy stocks. The rally had another sharp leg-up on Monday and Tuesday. This was despite a clutch of disappointing Manufacturing and Services PMIs from China, the US and UK, and some indifferent readings from across the euro zone. But no doubt poor data is once again seen as market-positive, as it raises the likelihood of further monetary easing.

The rally ran out of steam mid-week. There was no profit-taking sell-off, just a slowdown in buying. Investors decided to hold off from taking on additional equity exposure ahead of Friday’s US Non-Farm Payroll release, due to its importance ahead of the central bank meetings taking place over the next two weeks.

One thing that is worth noting, with nearly all companies in the S&P500 having reported fourth quarter earnings, overall sales growth (revenues) and earnings growth are down 4.5% and 8.4% respectively year-on-year. In addition, after crunching the numbers, analytics company FactSet wrote that the fourth quarter of 2015 marks the first time that earnings have had three consecutive quarters of year-over-year declines since 2009. I would argue that this is not yet reflected in equity prices. While it is possible that the major indices rally from here, if this trend in earnings continues then they will struggle to take out the highs made in the first half of 2015.

Commodity/ FX Outlook


Crude oil is another market which has had a sharp turnaround since Janet Yellen’s testimony on 11th February. The move is further evidence of how closely correlated (positively and negatively) most financial and commodity markets are currently. As with equities, prices spiked higher again at the beginning of last week but the buying petered out on Thursday as investors prepared themselves for Friday’s Non-Farm Payroll release.

Investors are now trying to work out whether the low for oil is finally in. Crude prices topped out in April 2011 - the same time that the US dollar hit an intermediate low. They then traded either side of the $100 mark until the Federal Reserve began winding down its programme of quantitative easing in mid-2014. After that oil fell rapidly until it hit a near 14 year low at the beginning of this year. Crude has rallied since then as investors became convinced that the Federal Reserve may hold off from raising rates by 100 basis points in 2016. Talk that OPEC and non-OPEC members could soon reach agreement over an output freeze has also helped to steady the market. Saudi Arabia, Russia, Venezuela and Qatar have led the move and a bigger meeting is planned for 20th March. However, even if the various players can agree to an output freeze, it doesn’t mean one will be implemented. On top of this, a freeze is not a cut and a significant production cut will be needed to make a dent in record high inventories.

Although WTI and Brent have managed to break and hold above resistance (now support) at $34 and $36 respectively, the upside looks limited. This feels more like a protracted bout of short-covering which could soon peter out if US production picks up again. It is understood that some US shale oil producers are getting ready to come back online once crude hits $40.

Gold/ Silver

It has been quite a year for gold so far. At the end of last year gold hit a fresh multi-year low and broke below $1,050. Back then there was plenty of speculation that it was set to fall further, perhaps below $1,000 or even down to $800 per ounce. However, it began to pick up in January on safe-haven buying amid fresh Chinese-inspired market turmoil. It has continued to rally ever since, perhaps as a warning that there are still plenty of concerns over the global outlook. Certainly, while equity markets appear remarkably sanguine over the global economy, gold has found plenty of fresh buyers, no doubt encouraged by the ever-growing popularity of negative interest rates. After all, if it looks like holding cash is going to cost you money, where’s the harm in owning gold? It may not pay you any interest, but it won’t charge you any either.

Gold surged through $1,200 back on 11th February. It then repeatedly failed to break above resistance around $1,240. However, this offered an opportunity for consolidation and for the moving averages to catch up. Over the next few weeks gold formed a rising pennant and finally broke above resistance last week. $1,240 is now support and the next big upside target is just north of $1,300 – the high from back in January 2015.

Gold was sharply higher on Friday morning. At one stage it was up 1.2% and hit $1,273, its highest level in more than a year. It gave back most of these gains ahead of Non-Farm Payrolls and went negative soon after its release. But it subsequently renewed its rally and made a fresh intra-day high. Both the technical and fundamental situations remain constructive.


The next couple of weeks are going to be very important for all financial markets, not least in FX. The expectation is that this week’s ECB meeting will bring further monetary stimulus. But that means there is always scope for disappointment.

The US dollar had rallied steadily since 11th February after Janet Yellen finished her second day of testimony in Washington. Prior to this investors had sold the greenback as they reassessed the likelihood of the Fed hiking rates by as much as 100 basis points over 2016. This had been the base case scenario back in December following the Fed’s decision to hike rates for the first time since June 2006. However, the loss of risk appetite since the beginning of the year, together with some dovish statements from Fed members changed perceptions. But Janet Yellen then assured everyone that the US recovery was on track, and that monetary tightening from the Fed was definitely on the table. The dollar rallied accordingly.

Friday’s Non-Farm Payrolls came in well above expectations. There was an increase of 242,000 jobs in February, well above the 195,000 anticipated. In addition, January’s number was revised up to 172,000 from 151,000. The dollar rallied initially as the better data suggested that further tightening from the Fed could be on the cards. However, the dollar soon gave back these gains and more. It’s possible that traders have decided to look past this data point and concentrate on this week’s ECB meeting. As noted before, there’s plenty of scope for the ECB to disappoint on stimulus. Also, from a technical perspective the dollar looked a touch overbought and ready for a correction.

*Prices are accurate at time of writing


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Posted by David Morrison

Category: Weekly Bulletin

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