Incisive market commentary from David Morrison

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Dark clouds ahead?
29 Jul 2016
BOJ underwhelms – JPY soars
29 Jul 2016
PM Bulletin: BOJ look-ahead
28 Jul 2016
AM Bulletin: FOMC leaves rates unchanged
28 Jul 2016
PM Bulletin: Yen swinging wildly on stimulus talk
27 Jul 2016
AM Bulletin: Fed rate decision and FOMC statement in focus
27 Jul 2016
PM Bulletin: FOMC look-ahead (and Japanese stimulus talk)
26 Jul 2016
AM Bulletin: FOMC meeting begins today
26 Jul 2016
Platform Tours: CFD Trading - Check Open P & L
25 Jul 2016
PM Bulletin: EURUSD breaks below 1.1000
25 Jul 2016
Weekly Bulletin: Fed and BOJ in focus
25 Jul 2016
PM Bulletin: Sterling looking vulnerable again
22 Jul 2016
AM Bulletin: Stocks lower as oil weighs
22 Jul 2016
PM Bulletin: The EURUSD and the ECB
21 Jul 2016
AM Bulletin: ECB rate decision ahead
21 Jul 2016
PM Bulletin: ECB look-ahead
20 Jul 2016
AM Bulletin: Q2 earnings keep markets buoyant
20 Jul 2016
PM Bulletin: A look at the yen
19 Jul 2016
AM Bulletin: More records for US equities
19 Jul 2016
PM Bulletin: Precious metals pull back
18 Jul 2016
Weekly Bulletin: It’s all about stimulus
18 Jul 2016
PM Bulletin: European banks in trouble
15 Jul 2016
AM Bulletin: Sombre mood following Nice atrocity
15 Jul 2016
PM Bulletin: The BoE rate decision
14 Jul 2016
AM Bulletin: All eyes on Bank of England
14 Jul 2016
PM Bulletin: BoE Rate Decision in focus
13 Jul 2016
AM Bulletin: Equities drift lower after record US close
13 Jul 2016
PM Bulletin: Global indices pushing higher
12 Jul 2016
AM Bulletin: Equity rally powers on
12 Jul 2016
PM Bulletin: Fresh record high for S&P500
11 Jul 2016
Weekly Bulletin: The markets called, NFPs answered
11 Jul 2016
AM Bulletin: The calm before the storm; Markets await today’s NFPs
08 Jul 2016
PM Bulletin: Non-Farm Payroll look-ahead
07 Jul 2016
AM Bulletin: As the Fed turns dovish, the markets turn bullish
07 Jul 2016
AM Bulletin: Concerns continue as Sterling touches $1.27
06 Jul 2016
AM Bulletin: Markets open higher, weak UK Construction PMI data removes confidence
05 Jul 2016
Weekly Bulletin: Central Banks react to Brexit vote
04 Jul 2016
AM Bulletin: When Carney speaks, the markets listen
01 Jul 2016
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Economic Outlook 

Last week began with Europe reeling from the fallout of the terror attack in Nice and a failed coup attempt in Turkey. This all came hard on the heels of the UK’s referendum decision to quit the EU. Geopolitical uncertainty and the prospect of a low growth, deflationary environment usually sees investors pile into bonds – particularly the highest-rated government debt – while simultaneously dumping equities. 

But these are unusual times. The world has changed since the financial crisis of 2008/9 and we are stuck in the midst of the most extraordinary experiment in monetary policy ever seen. The bull market in bonds is over thirty years old and there is now around $11 trillion worth of government debt which trades with a negative yield. This means that if you buy one of these bonds and hold it to maturity you will never get all your money back. Some safe haven! Yet quantitative easing has created an environment where investors can feel relatively relaxed buying up such financial instruments, confident that there will always be some other entity to sell on to at a higher price. Voila - a monetary perpetual motion machine!  But now may be a good time to take some money off the table. Last week (courtesy of Hedgeye) the Financial Times noted:

"Global defaults hit the milestone century mark last week, a 50% jump from the number of delinquencies at the same point last year and the highest level since the US emerged from recession in 2009.

The number rose by four to 100 in the first full week of July, as defaults in the US oil and gas sector ratcheted higher, according to Diane Vazza of S&P Global Ratings.

That brings the amount that has been defaulted on to $154 billion."

Back in the old days, this would be a terrible time to be long of the major stock indices. A low growth, deflationary environment makes it much more difficult for corporations to boost their earnings and revenues. Yet investors are pouring funds into equities as well as bonds. As we get further into the second quarter earnings season, we see company after company reporting lower earnings and revenues when compared to the same period last year. Despite this, last week saw the Dow Jones Industrials and the S&P 500 hit a succession of fresh record highs. Prices per share are going up while earnings per share are falling. This means that US stock indices in particular are trading at pretty hefty P/E multiples suggesting that earnings and revenues will have to improve sharply over the next few quarters to warrant current elevated share prices.

But investors have to get a return from somewhere. Fund managers can’t sit in cash waiting for a price correction and better opportunities. They have to shift their portfolio weightings (if allowed) and increase their exposure away from the “safety” of income-generating bonds to riskier equities which often pay a dividend much higher than any yield available in the bond market. On top of this, there’s also the hope of capital gains as share prices rise. However, there is always the danger of capital losses. But if you believe that central bankers will continue with their loose monetary policies, and that policymakers around the world are considering junking fiscal prudence for fiscal stimulus (see Japan) then that’s a massive piece of scaffolding propping up equity markets.

On Thursday the European central Bank (ECB) surprised no one when it kept all of its key interest rates unchanged. It also kept its monthly bond purchase programme unchanged in terms of size and duration. As with the Bank of England (BoE) the week before the ECB’s governing council said it needed more time to assess the impact of the UK’s decision to leave the EU. In the subsequent summary and press conference, ECB Mario Draghi noted that the risks to Euro area were “tilted to downside”. The ECB President also said that inflation expectations had fallen sharply in the aftermath of the Brexit vote. Partially this was to do with a slump in nominal bond yields. However, Mr Draghi seemed surprised that inflation expectations hadn’t fully recovered to pre-Brexit levels. He does seem concerned by ongoing deflationary pressures across the Euro zone. Overall, both the BoE and the ECB are expected to loosen monetary policy further at their next meetings in August and September respectively.

This week we have meetings from the US Federal Reserve and Bank of Japan (BOJ). There has been some speculation that the Fed is once again mulling at least one rate hike this year. But the central bank looks unlikely to move this week given that every other major central bank is talking of easing further and we’re now just a few months away from the US Presidential Election. Not only would even a modest hike be bad for US multinationals and consequently the stock market, but it would also lead to a stronger dollar. That may be good for the euro zone and Japan, but it would be terrible for China. China’s yuan is pegged to the dollar, so a stronger dollar means a stronger yuan which would crimp China’s export market. If the Chinese authorities reacted to this with a currency devaluation, then we could expect a nasty market reaction just as we saw last summer and at the beginning of this year.

As far as the BOJ is concerned the expectation is that further monetary stimulus is on the way. I’m not so sure. The BOJ may hold off for now, particularly as it looks as if Prime Minister Shinzo Abe looks set to unveil a massive programme of fiscal stimulus. Reports last week suggested that this could be as much as 20 trillion yen – twice the amount previously posited.

This week’s major economic releases include:

Monday               - EUR German Ifo Business Climate; GBP CBI Industrial Order Expectations

Tuesday               - GBP BBA Mortgage Approvals; USD S&P/CS Composite-20 HPI, Flash Services PMI, CB Consumer Confidence, New Home Sales, Richmond Manufacturing Index

Wednesday        - AUD CPI; CHF UBS Consumption Indicator; EUR GfK German Consumer Climate, Euro zone M3 Money Supply; GBP Prelim GDP, CBI Realized Sales; USD Durable Goods Orders, Pending Home Sales, Crude Oil Inventories, FOMC Statement

Thursday             - AUD Import Prices; EUR German Prelim CPI, Spanish Unemployment Rate, German Unemployment Change; USD Unemployment Claims, Goods Trade Balance

Friday                    - JPY Household Spending, Tokyo Core CPI, Unemployment Rate, Retail Sales, Prelim Industrial Production, BOJ Outlook Report, Monetary Policy Statement, BOJ Press Conference; AUD PPI; EUR French, Spanish, Italian, Euro zone CPI, euro zone Flash GDP; GBP Net Lending to Individuals, M4 Money Supply, Mortgage Approvals; CAD GDP; USD Advance GDP, Employment Cost Index, Chicago PMI, Consumer Sentiment, Inflation Expectations.

Equities Outlook

It’s still early days as far as the US second quarter earnings season is concerned, but it’s fair to say that investors remain relaxed to happy with results so far. The banking sector was the first to post results. JP Morgan (JPM), Citigroup (C), Wells Fargo (WFC), Bank of America (BAC), Morgan Stanley (MS)  and Goldman Sachs (GS) all beat (or met) forecasts for earnings although the reported revenues were a bit hit-and-miss. Once again, the general overview was that there were no nasty surprises while JPM outperformed its peers coming out best of the bunch. Nevertheless, it was the same old story when it came to year-on-year comparisons where the results showed yet another quarter of declining earnings growth, or a continuation of the “earnings recession” which looks set to hit its fifth consecutive quarter.

Other major earnings reports came from IBM (IBM), Johnson & Johnson JNJ), Intel (INTC), Netflix (NFX) and General Motors (GM).  As with the banking sector, the overall takeaway was that earnings were generally better than expected, while sales tended to disappoint. As far as post-earnings price movements were concerned, the market reaction was generally muted. The main exception was in Netflix which slumped after the company posted subscriber numbers that missed its own guidance. Netflix’s earnings were better-than-expected, but the company said it added 1.7 million subscribers during the quarter, well below its own expectations of 2.5 million.

As last week drew to a close there was a feeling that the positive momentum sparked by results from the banking sector was beginning to fade. This week will be much busier in terms of announcements so it will be interesting to see if the bullish sentiment returns, or if we’ve seen the best of the summer rally.


Commodity/ FX Outlook


Crude oil fell last week and it feels as if investors are more comfortable selling rallies than buying dips. At the beginning of June both Brent and WTI were trading above $50 per barrel and at their highest levels since October and July 2015 respectively. It looked as if the oil price was consolidating following a rally that began near the beginning of the year. That could still be the case as both contracts have only given back around 13 to 14% from their June highs. To put this in perspective oil prices had effectively doubled since the beginning of the year.

But there are signs that a shift in sentiment has occurred over the past month. The rally that took oil from around $25 per barrel earlier this year to over $50 in June was driven by the belief that supply and demand were coming back into balance far quicker than previously estimated. Global demand was expected to be robust for 2016 as evidence came through that the US economy was recovering. It’s worth remembering that we spent the first half of this year speculating over the timing of the US Federal Reserve’s next rate hike. The Fed would only be considering such a move if they felt the economy was strong enough to respond positively to tighter monetary policy. But now the prospects for a rate rise in 2016 look remote – no matter what various regional Fed Presidents may try to suggest. On top of that we’re looking at further monetary easing from the ECB, Bank of England and the Bank of Japan over the next few months. While such stimulus should boost asset prices in theory, it doesn’t give investors much confidence in the global economic outlook. On top of that we’ve had unprecedented monetary stimulus for the past eight years with precious little growth to show for it. Finally, even with the Fed on hold, stimulus from other central banks looks likely to keep a floor under the dollar. That should mean that dollar-denominated commodities like oil struggle to make further gains.

Recent inventory data has shown that global stockpiles remain near record levels. At the same time the outlook for demand growth has been downgraded.  Last week the International Monetary Fund (IMF) downgraded its forecast for global growth. The IMF now expects this to come in at +3.1% for 2016 which is 0.1% lower than its April forecast and 0.6% lower from its 2016 outlook from the same time last year. It also marked down its 2017 prediction to +3.4% from +3.5% in April. But apart from a brief tremor across FX, there was precious-little market reaction and bonds and equities kept on rising. The reason of course is that every bit of negative news only boosts expectations of further monetary easing by the developed world’s central banks.


Crude oil wasn’t the only dollar-denominated commodity to struggle last week. Gold and silver also pulled back sharply and these moves coincided with a further pick-up in the US dollar. This marked the second consecutive week of heavy losses for the two precious metals following the large rallies which came in the aftermath of the UK’s decision to quit the European Union.

Investors cut their exposure to precious metals as the Dow and S&P500 made a succession of record highs. This risk-on move, together with a stronger dollar, saw money drift out of safe-haven plays, particularly gold and silver. Gold slipped below support around $1,320 on a number of occasions and a few closes below this level would suggest a retest of support around $1,300 or even $1,280. Ahead of the referendum gold traded down to $1,260.

As far as silver is concerned, it broke below $20 per ounce midweek and this level could now act as resistance. There is some support coming in around $19.30 but a break below here could open up the prospect of a pull-back down to a major support area around $18.

Once again attention is focused on the world’s major central banks. Over the past two weeks we’ve seen both the Bank of England (BoE) and European Central Bank (ECB) hold back from loosening monetary policy further. However, both central banks have left the door open for further easing at their next meetings in August and September respectively. Last Friday’s weak UK Manufacturing and Services PMI’s increased the likelihood of a move from the BoE while the corresponding data releases from across the Euro zone held up quite well.

This week we have meetings from the US Federal Reserve and the Bank of Japan (BOJ). It doesn’t look as if the Fed will be raising rates this week, or even this year, despite the big jump in June Payrolls. But the expectation is that the BOJ will do something on Friday. Given that there’s speculation of 20 trillion yen’s worth of fiscal stimulus being arranged by Japanese policymakers, it could be that the BOJ holds off for now. If so, the precious metals may have further to fall in the near term.


Last week we saw the US dollar strengthen against the majors. The EURUSD pulled back to test support around 1.1000 which roughly marks the 38.2% Fibonacci Retracement of the sell-off from August to November 2015. This level held firm after the ECB refrained from making any changes to its monetary policy. Nevertheless, ECB President Mario Draghi made it clear that he remains concerned with the ongoing deflationary pressures across the Euro zone and left the door open for further stimulus in September. At the same time, the Fed may want to keep the market guessing when it comes to tightening, but is probably still in no hurry to raise rates this year and potentially extinguish what is a tepid recovery at best. The Dollar Index pushed above resistance around 96.00 and is now trading at its highest level since March this year.

Sterling gave back a significant proportion of its gains from the prior week. Back then it had recovered sharply as Theresa May became Prime Minister without a drawn out leadership campaign and so dampened a lot of political uncertainty. Sterling also gained after the BoE held off from loosening monetary policy in the aftermath of the Brexit vote. However, the British pound is still trading near multi-decade lows. The GBPUSD really needs to take out its pre-referendum low around 1.3850 to truly be out of the danger zone. It came under further downside pressure at the end of last week following the release of a dismal set of Manufacturing and Services data. July’s Manufacturing PMI fell to 49.1 which was better than the consensus expectation of 47.8 but still sharply below the prior month’s reading of 52.1. But the real damage was done in the service sector. The Services PMI slumped to 47.4. This was weaker than the 48.9 number anticipated and miles down on the previous reading of 52.3. The two PMIs came in below the 50 threshold so indicating contraction in both sectors. In addition the data showed the sharpest rate of economic contraction since early in 2009 when we approached the nadir of the financial crisis.

The Japanese yen has weakened considerably over the last fortnight which will come as a big relief to Japan’s policymakers and central bankers. The sell-off began after Japan’s ruling Liberal Democratic Party cleaned up in upper house elections. Since then there has been talk that Prime Minister Shinzo Abe is preparing to announce a fiscal stimulus package worth up to 20 trillion yen – twice what was originally suggested.

The other talk has been about the prospect of further stimulus from the Bank of Japan which meets this Thursday and Friday. Much of the chatter has focused on the idea of “Helicopter Money” which would take stimulus to a new, untried and untested level. However, Thursday saw the yen rally following the broadcast of comments from Bank of Japan (BOJ) Governor Haruhiko Kuroda. Mr Kuroda had taken part in a Radio 4 programme called: “How low can rates go” during which he said that “Helicopter Money” was neither needed nor possible. The USDJPY dropped sharply and broke below 106.00 but subsequently bounced.

But there are a couple of points to make about Mr Kuroda’s comments. Firstly, the Radio 4 programme was pre-recorded, not live. It had been scheduled for some time so it’s fair to assume that the BOJ Governor’s comments weren’t exactly fresh. Secondly, back in January Mr Kuroda told Japanese policymakers that there were no plans to adopt negative interest rates little more than a week before the central bank did exactly that. So perhaps we shouldn’t read too much into this interview response. It seems that there would need to be a change in the law before Japan could launch “Helicopter Money” so it’s unlikely to be announced at the BOJ’s meeting this week. However, that’s not to rule it out completely. But one thing is for sure; if the BOJ doesn’t loosen monetary policy further, then expect the yen top rally sharply.


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Posted by David Morrison

Category: Weekly Bulletin

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