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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
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 Monday 29 February 2016

Weekly Bulletin: Equity rally continues

 

 

Week Ahead: Monday 29th February – Friday 4th March   

Economic Outlook  

The last few weeks have seen strong rallies in most global stock indices. The Dow Jones Industrial Average has tacked on around 8% from its low point on 11th February. The FTSE100 is up about 10% over the same period while the German Dax has split the two of them with a 9% gain. The oil market hasn’t slouched around either: Brent crude is up 20% while WTI is close to 30% higher than its lowest point in early February.

And what was the trigger for this stonking “risk on” move? Well, Janet Yellen would be the answer. Over two days the Chairman of the US Federal Reserve testified before members of Congress and the Senate. She managed to calm investors following a torrid start to the year for financial markets. She persuaded them that, while there were justifiable concerns over the global outlook, their fears were overdone. The US economy was still improving, although she expressed concerns over the decline in equities and dollar strength. The dollar has strengthened further since then, but equity markets have definitely picked up.  Yet at the same time it would be wrong to assume that the central bank’s projections for further tightening over 2016 were set in stone.

This increase in investor risk appetite has come during a period when there has been relatively little in the way of market-moving news, apart from changes in the oil price. On the corporate side, the fourth-quarter earnings season has dribbled to a close. Economic data releases have failed to derail, and may have even encouraged, a resurgence of bullishness. In addition, we’ve had a hiatus when it comes to central bank meetings, which continues this week. This really is the calm that precedes the storm. The European Central Bank (ECB) meets next week. Then the Bank of Japan (BOJ) and US Federal Reserve will announce their policy decisions the week after. These are big quarterly meetings when the important decisions are typically announced. Expectations are running high for additional stimulus from both the ECB and BOJ so there is plenty of scope for disappointment. Not only that, but the Fed’s FOMC now has to decide whether to talk up US growth prospects and plough ahead with another rate hike or duck back below the parapet with no change, and so fall in line with market expectations. Either way, its accompanying statement and Economic Projections will be of vital importance in steering investors over the next quarter.

But before that we have to deal with Friday’s Non-Farm Payroll numbers. This remains the most important data release as far as investors are concerned. The US employment situation is seen as central to the Fed’s monetary policy decisions and a strong number will boost the prospect of a rate hike at the March meeting.


This week’s major economic releases include:

Monday - GBP Net Lending to Individuals, M4 Money Supply, Mortgage Approvals; EUR CPI Flash Estimate; USD Chicago PMI, Pending Home Sales

Tuesday - AUD RBA Rate Statement, Building Approvals, Current Account; CNY Manufacturing PMI, Non-Manufacturing PMI, Caixin Manufacturing PMI; EUR Spanish, Italian, French, German, Euro zone Manufacturing PMIs, Unemployment Rate; GBP Manufacturing PMI; CAD GDP; USD ISM Manufacturing PMI, Construction Spending

Wednesday - AUD GDP; GBP Construction PMI; USD ADP Non-Farm Employment Change, Crude Oil Inventories, Beige Book

Thursday - AUD Trade Balance; CNY Caixin Services PMI; EUR Spanish, Italian, French, German Euro zone Services PMIs, Retail Sales; GBP services PMI; USD Weekly Jobless Claims, ISM Non-Manufacturing PMI, Factory Orders

Friday - AUD Retail Sales; CAD Trade Balance; USD Non-Farm Employment Change, Average Hourly Earnings, Unemployment Rate, Trade Balance.

 
Equities Outlook

There was a broad-based recovery in global equity markets last week. Most major indices built on the gains made since 11th February when Federal Reserve Chairman Janet Yellen testified before members of Congress and the Senate. The UK’s FTSE100 is up around 10% from its lowest point on 11th February, and some of the most beaten-up sectors this year have seen the most impressive recoveries. A quick glance at companies taken at random from the “Mining” sector shows that Glencore (GLEN) is up 44%, Anglo American (AAL) 45% and Rio Tinto (RIO) 16% - all over the same period. In “Oil & Gas” BP (BP) rallied 12% and Royal Dutch Shell (RDSB) 16%. Even the “Banking” sector got in on the action. Barclays (BARC) and HSBC (HSBA) were both up 10%, managing to equal the overall gains of the underlying index. However, thanks to the surprise announcement of a £2 billion dividend, Lloyds (LLOY) jumped 28% over the same period.

 
Commodity/ FX Outlook


Oil 

The oil market has changed dramatically over the past ten years or so. US shale oil has been a game-changer and OPEC is no longer the power it was. It is no longer possible to manipulate the oil price through cartel agreements to increase or lower production. This is because OPEC’s share of global production has fallen by about 10% over the last couple of years and now stands at 40%. This is still substantial, but it does mean that oil producers outside of OPEC have increased influence. In addition, the interests of individual OPEC members are no longer closely aligned. The Gulf States, led by Saudi Arabia, refuse to cut production in the continued hope that the falling oil price will drive US producers out of business. At the same time they are determined to maintain market share. Meanwhile, countries such as Venezuela and Nigeria are in dire straits and desperate for a higher oil price. They want OPEC to agree to production cuts, the brunt of which would be borne by Saudi and other Gulf States.

On Friday the near-month Brent and WTI contracts were both testing resistance at $36 and $34 respectively. It could be that the low is now in for oil with the catalyst for last week’s short-covering being the production freeze agreement between Saudi Arabia, Russia, Venezuela and Qatar. The all-important response from Iran to a potential output ceiling was confusing. Initially Iran described it as “illogical”, and then they decided the freeze could be a useful first step in curbing output.

Saudi oil minister Ali al-Naimi said that more countries would join a deal to freeze output. OPEC and non-OPEC producers are planning a meeting to discuss the issue in March. Yet the bottom line is that the oil price will only get a significant and permanent lift from a production cut. A freeze, or ceiling, isn’t enough on its own. Ali al-Naimi also said last week that even if oil producers agreed to output cuts they would never deliver on them. Nevertheless, it does feel as if any agreement is better than none, and this is helping to stabilise prices.


Gold/ Silver

The outlook for gold continues to be constructive. It spent last week consolidating above $1,200 and this level is now the first point of resistance for any pull-back. Below here the area around $1,180 is also significant. It acted as support during the first half of last year and also resistance back in October. The area between $1,240 and $1,250 continued to act as resistance last week and gold may need to consolidate further before it can launch a successful assault on this area. On the plus side, gold is looking less overbought than it was two weeks ago and this may encourage some fresh buying. There is certainly growing evidence that the metal is coming back into favour with investors after a long absence. From a fundamental perspective, the prospect of additional monetary stimulus from the ECB, BOJ and PBOC all helps gold’s cause as does any chatter of negative interest rates. However, there is the danger that the central banks fall short of expectations next month. This worry, together with the (admittedly small) prospect of a Federal Reserve rate hike, may mean that gold remains range bound until after the central bank meetings which end mid-March.


Forex

The US dollar continued to strengthen last week against most of the majors. As usual it was the apparent divergence in central bank monetary policy which dictated market direction. As things stand it sounds as if both the European Central Bank (ECB) and Bank of Japan (BOJ) are preparing to ease monetary policy further when they meet in March. This is in contrast to the US Federal Reserve which is frantically trying to persuade the market that it is keeping its options open over a further rate hike.

At the end of last week the British pound fell further against the US dollar. Earlier in the week it had crashed below 1.4000 for the first time since March 2009. However, it took another lurch down in late European trade on Friday. Sterling plunged on fears that the campaign for the UK to leave the EU was building some momentum. Much has been said about how the sell-off in sterling shows how bad a Brexit would be for Britain. But all it really says is that markets dislike uncertainty and investors tend to sell first and ask questions later. It is worth remembering that cable has been in decline since the summer of 2014. Back this this was as much a function of dollar strength as sterling weakness when the US Federal Reserve indicated that it was preparing to wind down its monthly bond purchase programme. It finally ended QE in October that year. At the same time, Bank of England governor Mark Carney was indicating that UK interest rates could rise sooner than later while ECB President Mario Draghi announced a negative deposit rate and agitating for a QE programme of his own. Sterling fell in the face of an unrelenting dollar rally, but pushed higher against the euro. It was only when Mr Carney repeatedly flip-flopped on his outlook for rates that investors appeared to lose confidence in sterling. Support for GBPUSD comes in around 1.3700 and 1.3500. The 20-year chart shows that cable rarely strays below 1.4000 for long. But we may have to wait until after the Fed’s March meeting and rate decision to get any signals that the sell-off in sterling is coming to an end.

Written by David Morrison

*Prices are accurate at time of writing

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin Weekly

Category: Weekly Bulletin


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