Incisive market commentary from David Morrison

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Collapse October <span class='blogcount'>(37)</span>October (37)
Central banks and US payrolls in focus - Weekly Bulletin
31 Oct 2016
Revised Trading Hours - UK British Summer Time (BST) ends, 30th October 2016
28 Oct 2016
US GDP in focus - AM Bulletin
28 Oct 2016
US stock indices still range-bound
27 Oct 2016
Equities drift on mixed earnings
27 Oct 2016
Earnings season, oil and the US dollar - Video Update
26 Oct 2016
Apple disappoints - AM Bulletin
26 Oct 2016
Silver range-bound - PM Bulletin
25 Oct 2016
Equities up on deals and earnings - AM Bulletin
25 Oct 2016
Spread betting charges – overnight financing - Trading Guide
24 Oct 2016
USD rally continues - Weekly Bulletin
24 Oct 2016
Deutsche Bank trades at pre-DOJ fine levels : AM Bulletin
21 Oct 2016
ECB Decision in less than 400 words - PM Bulletin
20 Oct 2016
Oil’s move to a 15-month high supports global markets - AM Bulletin
20 Oct 2016
Intel buck earnings trend as the Fed takes centre stage again - PM Bulletin
19 Oct 2016
WTI eyes resistance around June highs - PM Bulletin
18 Oct 2016
US/UK inflation data in focus - AM Bulletin
18 Oct 2016
How to know what to spread bet on : Trading Guides
17 Oct 2016
Dollar up on December rate hike speculation - Weekly Bulletin
16 Oct 2016
Oil sparks recovery on Wall Street - AM Bulletin
14 Oct 2016
FOMC minutes - hawkish or dovish? - PM Bulletin
13 Oct 2016
Weak Chinese trade number hits miners - AM Bulletin
13 Oct 2016
US indices range-bound ahead of election - Video Update
12 Oct 2016
FOMC minutes in focus - AM Bulletin
12 Oct 2016
Sterling at fresh multi-year lows : PM Bulletin
11 Oct 2016
Brent crude hits 12-month high - AM Buleltin
11 Oct 2016
How Spread Betting Works : Trading Guides
10 Oct 2016
Another disappointing US payroll report - Weekly Bulletin
09 Oct 2016
Sterling “flash crash” and US Non-Farm Payrolls - AM Bulletin
07 Oct 2016
Non-Farm Payroll look-ahead - PM Bulletin
06 Oct 2016
AM Bulletin: Equities up on data releases and oil
06 Oct 2016
Video Update: OPEC’s production cut promise poses some questions
05 Oct 2016
AM Bulletin: Precious metals slump on USD rally
05 Oct 2016
PM Bulletin: Sterling lurches lower
04 Oct 2016
AM Bulletin: Firmer start for global equities
04 Oct 2016
Trading Guide: How to use Stop Losses in spread betting
03 Oct 2016
Weekly Bulletin: Important week for data releases
03 Oct 2016
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Economic Outlook 

Friday was not only the end of the week and month, but also brought the third quarter to a close. Now we await the corporate earnings season which doesn’t kick off until next week and won’t really get going until the end of this month. We’ve also now heard the latest from the world’s major central banks and it’s pretty clear that markets can luxuriate in loose monetary policy for some time to come. The European Central Bank (ECB), Bank of Japan (BOJ) and Bank of England (BoE) have all indicated that an easing bias remains. The People’s Bank of China will no doubt do whatever they’re told to do by an increasingly authoritative politburo. Meanwhile the US Federal Reserve doesn’t dare hike rates for fear of triggering a crash in equity and bond markets. Despite all this, there are concerns that central banks are coming to the end of the line where quantitative (and qualitative) easing is concerned. I wouldn’t be so sure about that. While there has been increasing chatter about how it’s now up to governments to take over the controls and boost fiscal stimulus, there are still plenty of financial assets that central banks could buy. Central banks may have started out by purchasing only short-term government debt from financial institutions, but they have now expanded their portfolio of assets to include longer-term sovereign bonds, corporate bonds, and, in the case of the BOJ, equity ETFs. There appear to be few barriers to stop our central bankers from hoovering up financial assets of poorer and poorer quality. And what barriers there are can always be lifted with a quick legislative tweak which will pass through easily the next time there’s a financial crisis. On top of this there’s also the prospect of “Helicopter Money” being adopted whereby another few rule changes would make it permissible for central banks to purchase government debt directly from the relevant Treasury or Ministry of Finance. Anything is possible if we don’t see a pick-up in growth and inflation or, heaven forbid, we get a stock market sell-off.

By early November we’ll have a good idea about how the third quarter earnings season is panning out. We’ll also be just a few days away from the US Presidential Election. But that doesn’t mean that markets will be on hold during October. For a start, there will be no let-up in speculating over the timing of the next Fed rate hike. That means that every significant US data release will be instantly evaluated as to whether it indicates a stronger or weaker economy. Next week we have the latest updates on US ISM Manufacturing and Non-Manufacturing PMIs. These both fell sharply last month with manufacturing falling into contraction territory for the first time in six months. Non-manufacturing expanded, but at its lowest rate in over six years. Then on Friday we get September Non-Farm Payrolls. This is generally considered to be the most important US economic data release and certainly has the potential to move markets dramatically if it comes in outside market expectations. Later on Friday we have speeches from FOMC-voting members Stanley Fischer, Loretta Mester, Esther George and Lael Brainard. We can expect all of them to talk up the US economy and the prospects of a December rate hike, even though Fischer and Brainard are renowned doves.

This week’s major economic releases include:


CNY Bank Holiday; EUR German Bank Holiday; Spanish, Italian, French, German, Euro zone Manufacturing PMI; GBP Manufacturing PMI, FPC Meeting Minutes; USD ISM Manufacturing PMI, Construction Spending, Total Vehicle Sales


CNY Bank Holiday; AUD Cash Rate, RBA Rate Statement, Building Approvals; EUR Spanish Unemployment Change; GBP Construction PMI


CNY Bank Holiday; AUD Retail Sales; EUR Spanish, Italian, French, German, Euro zone Services PMI, Retail Sales; GBP Services PMI; USD ADP Non-Farm Employment Change, Trade Balance, Final Services PMI, ISM Non-Manufacturing PMI, Factory Orders, Crude Oil Inventories


CNY Bank Holiday; AUD Trade Balance; EUR German Factory Orders, ECB Monetary Policy Meeting Accounts; USD Challenger Job Cuts, Unemployment Claims, Treasury Currency Report


CNY Bank Holiday; EUR German, French Industrial Production; GBP Halifax HPI, Manufacturing Production, Goods Trade Balance, Industrial Production; CAD Unemployment Rate; USD Non-Farm Employment Change, Unemployment Rate, Average Hourly Earnings, Wholesale Inventories; IMF Meetings


IMF Meetings


MF Meetings

Equities Outlook

Deutsche Bank’s (DBK) share price slumped last week. The stock has fallen around 30% in less than a month and is down 55% for the year so it’s not as if its troubles haven’t been well-publicised. Deutsche scored poorly in both European and US banking stress tests earlier this year. On top of this the IMF identified it as the world’s riskiest systemically significant bank (Deutsche is Germany’s largest bank by total assets).

But the straw that appeared to break the camel’s back was news that the US Department of Justice (DOJ) had proposed a $14 billion penalty relating to the bank’s involvement in residential mortgage-backed securities ahead of the financial crisis. This was well above the amount pencilled in by analysts and the bank’s own provision which was nearer the $4 billion mark. Deutsche said that it had no intention of settling anywhere near $14 billion, and looking at what other large investment banks have paid so far, they should get away with less. (Rumours late on Friday suggested the fine could be closer to $5.4 billion – much better, but still means Deutsche will need to raise cash from somewhere).

Investors rushed to dump the stock following a story that the German government was putting together a rescue package. Deutsche CEO John Cryan denied that the bank had requested any help or needed a bailout, while the German Finance Ministry denied it was working on an emergency plan. There were other Deutsche Bank-related denials last week as well. ECB President Mario Draghi denied that the central bank’s interest rate policy was responsible for Deutsche’s woes and denied the IMF’s statement from earlier in the year that the bank was systemically important. Meanwhile, IMF MD Christine Lagarde denied that government intervention was required to rescue the bank. The trouble is that as far as investors are concerned, when all the bigwigs start wildly denying everything (and contradicting each other), it’s a fair bet that something’s gone badly wrong. Then on Thursday evening Bloomberg reported that a number of funds that clear derivatives trades through Deutsche had withdrawn excess cash from the bank. The stock slumped over 8% in early trade on Friday as investors were suddenly reminded how the 2008 banking crisis began. Once depositors start to withdraw funds, confidence can evaporate rapidly leading to further withdrawals which can turn into a solvency issue.

But a number of analysts were less downbeat and were quick to assure their customers that this was not another “Lehman Moment.” They pointed to Deutsche’s impressive balance sheet and liquidity reserves. And indeed, shares in Deutsche rallied sharply on Friday afternoon. However, the Euro zone’s banking sector remains fragile and investors are nervous. Deutsche Bank’s position is concerning and if the German government does have to organise a rescue and bail-out, the political blow-back could help to finish off Chancellor Merkel’s re-election chances next year.

Commodity/ FX Outlook


Crude oil rallied sharply last week with all the gains stemming from a surprise announcement at the end of the International Energy Forum (IEF) meeting in Algeria on Wednesday. Confounding all expectations, OPEC committed itself to a production cut which could reduce the cartel’s output to between 32.5 and 33 million barrels per day (bpd). This would represent a reduction of anything between 240,000 and 740,000 bpd when considering that OPEC pumped out around 33.24 million bpd in August. If the production cut goes ahead, this would be the first time that the cartel has reduced output since 2008 during the financial crisis. The news led to a sharp spike in crude oil and energy stocks in general.

Ahead of the meeting the feeling was that oil producers would be unable to agree to even a freeze on output, let alone an outright cut. Bear in mind that Saudi Arabia warned the market not to expect any agreement at the Forum. Indeed, the Doha meeting back in April broke up amid recriminations and bad feeling as Saudi Arabia refused to support a freeze if Iran was granted an exemption. Iran had argued that it should be exempted from any freeze as it was in the process of boosting production to counter the damage caused to its oil industry by years of sanctions. These were only lifted at the beginning of this year. But this time round Saudi Arabia appeared to soften its stance saying that Iran (along with Libya and Nigeria where oil production has been hampered by violent unrest) would not be as tightly bound as other countries to output restrictions.

But OPEC’s announcement was shockingly light on detail. For a start, there’s a very big difference between a daily output cut of 240,000 barrels and one of 740,000 barrels. Then of course OPEC has to decide which countries will be making cuts and by how much. Will Iran, Libya and Nigeria be granted exemptions and will non-OPEC countries like Russia also take part? On top of this how is OPEC going to ensure compliance? All these decisions have been kicked down the road until the next OPEC meeting at the end of November. In the meantime, US shale oil producers must be thrilled by all this. With crude heading back towards $50 they have every incentive to ramp up production. This should make them the biggest beneficiaries of last week’s production cut promise. 


Gold and silver drifted lower last week and gave back a fair proportion of their gains made in the aftermath of central bank meetings the week before. As usual, the two precious metals tended to move inversely with the US dollar. The only exception came when all three rallied together when investors showed signs of panic on Deutsche Bank’s slump.

As noted in previous commentaries, precious metals can do well under a number of different economic situations. They tend to hold their value during times of inflation but can also do well in a low growth, deflationary environment. This is because central banks are forced to cut interest rates in an effort to boost economic activity. This benefits assets which don’t pay either a yield or dividend so the lost-opportunity cost of owning gold or silver decreases in this scenario as “risk-free” returns decline elsewhere.

Gold and silver shot higher after the US Federal Reserve once again chickened out of hiking its headline fed funds rate. Rather perversely, the FOMC insisted that the case for raising rates had strengthened, despite an obvious downturn in US economic data. Many commentators came to the conclusion that the Fed was maintaining its loose monetary policy because it continues to place too much store on the behaviour of the equity market. There are also suspicions that there is a political aspect in the Fed’s decision-making process although Fed Chair Janet Yellen has repeatedly denied that this is the case. But the bottom line is that the Fed didn’t want to run the risk of a sell-off in equity and bond markets just a few weeks ahead of the US Presidential Election. While it needs to lift interest rates in order to have room to ease once the next recession hits, if the Fed acted now it risks tightening monetary policy just as the US economy shows signs of further weakening. If this is the case then gold and silver should continue to find support. However, any positive economic data or hawkish Fed speeches are likely to see precious metals sell off. Consequently, we may find that gold and silver, along with the dollar, find it difficult to break out of their current trading ranges.


Most currency pairs ended last week little-changed. Despite this, there had been some market volatility and there was even speculation that the Swiss National Bank had intervened to keep a lid on the Swiss franc’s gains. On Thursday and early Friday morning investors had rushed to safe haven currencies like the Swissy as fears grew that the problems at Deutsche Bank could spread throughout the European and global banking system. However, by Friday afternoon the situation had stabilised. Shares in Deutsche Bank ended the day close to 7% higher having opened 8% lower. The turnaround in the stock came on reports that the bank was close to settling a fine with the US Department of Justice (DOJ). Just over a week ago the DOJ had hit Deutsche with $14 billion penalty relating to the bank’s involvement in residential mortgage-backed securities ahead of the financial crisis. This was more than three times what the bank had provisioned for. However, on Friday afternoon it appeared the two sides were close to agreeing to a fine of $5.4 billion. While considerably better than $14 billion, it is still somewhat higher than the $4 billion that many analysts had predicted. But it’s also worth considering that nobody seriously considered that Deutsche would have to pay anything approaching the original penalty. So while important, the fine is just one of many problems that Deutsche Bank still has to deal with. The story isn’t over yet.

Also on Friday there were a number of positive US economic data releases. Inflation (as measured by the Fed’s preferred Core PCE index) ticked higher while Consumer Sentiment and the Chicago PMI also came in better-than-expected and above their respective levels from the prior month. Despite this, the US dollar was lower ahead of the European close. Investors seemed unwilling to consider that the better data had increased the prospects of a Fed rate hike before the year-end. Perhaps December just seems too far away to worry about. Despite this, there is a string of important data releases due out this week. Early on we have the Manufacturing and Non-Manufacturing PMIs, but the week rounds off with the latest update on Non-Farm Payrolls. These are all reports which have a direct impact on rate hike expectations so will be market-moving if they deviate from expectations.


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

Category: Weekly Bulletin

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