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 8th – Friday 12th February

Economic Outlook 

The increased market volatility that we’ve seen since the New Year sees no sign of abating. There are just so many uncertainties swirling around global markets including the outlook for global growth, the outbreak of currency wars, the next move for oil prices, high stock market valuations amid a disappointing earnings season and stresses in the high-yield bond market. But perhaps most important is the market’s ongoing reassessment of the outlook for global monetary policy over the coming year.

We’ve just had updates from the key central banks: the ECB hinted at more stimulus at its next meeting in March; the Fed did nothing but stressed that they are keeping an eye on market developments; the Bank of Japan instigated a Negative Interest Rate Policy, and insisted they were prepared to go further, and the Bank of England kept rates unchanged again, but dialled down its growth forecasts and turned more dovish. MPC member Ian McCafferty decided not to vote for a rate hike for the first time since last August.

We now have to wait until 10th March to see if the ECB will come up with the goods or once again fall short of market expectations. There’s really only so many times Mr Draghi can come up with variations on his promise to “do whatever it takes.” Once that’s out of the way, the following week brings a two-day meeting of the Fed’s FOMC which ends on 16th March. It’s worth remembering that just a few months ago there was speculation that the Fed would announce a further 25 basis point hike at this meeting. That looks ridiculous now given the market turbulence since the New Year.

Now all the talk is of the Fed backing down from its projected 100-basis point rate increase for the rest of the year. That means we’re in a bit of a vacuum for the next five weeks with only rhetoric and jawboning from central bankers to give us clues, or misdirection, over the path of future monetary policy. Market volatility looks set to continue.

A more immediate concern is Chinese New Year. China’s markets (and many businesses) will be closed this week. Investors should still be on their guard in case the authorities there use this as an opportunity to add stimulus, move the USDCNY fixing or make other policy adjustments.

This week’s major economic releases include:

Monday - CNY Bank Holiday; CAD Housing Starts, Building Permits; USD Mortgage Delinquencies.

Tuesday - CNY Bank Holiday; JPY Prelim Machine Tool Orders; EUR German Trade Balance; GBP Trade Balance; USD JOLTS Job Openings, Wholesale Inventories

Wednesday - CNY Bank Holiday, M2 Money Supply, New Loans; GBP Manufacturing Production, Industrial Production; USD Fed Chair Yellen Testifies, Crude Oil Inventories, Federal Budget Balance

Thursday - CNY Bank Holiday; JPY Bank Holiday; USD Unemployment Claims, Fed Chair Yellen Testifies; AUD RBA Governor Stevens Speaks

Friday - CNY Bank Holiday; AUD Home Loans; EUR German Prelim GDP, German Final CPI, French Prelim Non-Farm Payroll, Italian Prelim GDP, Euro zone Flash GDP, Euro zone Industrial Production, ECOFIN Meetings; USD Retail Sales, Import Prices, Consumer Sentiment, Inflation Expectations, Business Inventories, FOMC Member Dudley Speaks.

Equities Outlook

This has been the worst start to a year for equities since 2009. This was when the global economy was in complete melt-down and before central bankers and policymakers launched their unprecedented monetary stimulus and all their financial rescue packages. Of course, in early 2009 the world’s major equity markets had already lost around 40% of their value. They had more to lose, but the sell-off was closer to the end than the beginning.

But as things stand the major US indices are still officially in a bull market. Despite the China-inspired summer turbulence and the New Year sell-off, the Dow Jones Industrial Average and S&P500 are only around 11% off their all-time highs. It takes a full 20% decline to mark the end of a bull market – one that has been running now with barely a pause for breath for nearly seven years.

Of course, what goes for the US doesn’t necessarily apply elsewhere. The FTSE100 for instance has lost around 16% of its value since hitting its own all-time high last year. The UK index has been body-slammed thanks to the heavy weighting in it of miners, oil majors and banks – all having a torrid time of late. Yet a 16% loss isn’t enough to call it a bear. It’s a different story for the German Dax. The top-end engineering, industrial and chemical conglomerates which dominate the German index have been hit hard – not just by the economic slowdown across Europe, but also by China which is a major export market for Germany. The Dax is down 24% since last April.

So it’s worth pondering whether Europe is oversold or the US over-optimistic about the future? The fourth quarter earnings season may provide some clues where results are in for around 40% of S&P500 companies. As this stand it looks as if the last quarter of 2015 will register the third straight decline in quarterly earnings for companies in the S&P500, and the last time that happened was 2009. Sales (revenues) are on course to register their fourth consecutive decline.

The P/E ratio is one of the key metrics for measuring how cheap or expensive stocks are, relative to each other and historically. P = price per share while E = earnings per share. The “E” is dropping sharply so unless the “P” element does too, there could soon be a time when US equities look far too expensive, historically and when compared to European stocks.

Commodity/ FX Outlook


Two weeks ago it looked as crude oil had achieved “escape velocity” and could finally shake off the sub-$30 per barrel level. This is important as investors in all manner of risk assets see sub-$30 crude as a real danger sign. Back then oil got a lift on dovish rhetoric from the ECB and Federal Reserve, and further monetary easing by the Bank of Japan. Last week there was also speculation that OPEC and non-OPEC producers were preparing to meet to discuss output cuts. However, the near-month WTI contract dipped back below $30 on a couple of occasions midweek and there are still concerns that the sell-off which began in the summer of 2014 still has some way to go.

The next few weeks will be a testing time for the oil market. For a start, we have to wait until March for the next ECB and Federal Reserve meetings. Until then oil is only likely to get a lift from dollar-negative dovish statements from FOMC members. Then there is the possibility of agreement being reached between OPEC and non-OPEC members. As the two countries behind last week’s story were Russia (non-OPEC) and Venezuela (OPEC), the news isn’t really worth taking seriously. Both countries are perhaps the two biggest casualties from the slump in oil prices. But Russia doesn’t speak for non-OPEC producers (which include the US) while Venezuela hardly represent OPEC which is controlled by Saudi Arabia. Nevertheless, both countries will take some comfort as they played an important role in shifting the price of oil up by close to 10% in a day. That alone will take some pressure off them both. But Venezuela probably needs oil prices to double over the next month or so to avoid further socio-economic chaos.

It is worth noting that last week Morgan Stanley slashed its forecast for oil prices this year by 50% and now expects Brent to average around $30 per barrel until the second quarter of 2017. The bank predicts that demand will be lower than expected while supply will prove to be greater than anticipated. In addition, they expect inventories to rise while “increased hedging incentives all work to delay rebalancing.” They also believe that the US dollar is set to rise further which will also put downside pressure on oil prices. Of course, estimating future oil supply and demand is one thing, but predicting where the dollar is going over the next twelve months is something else entirely. It is quite possible that the dollar bulls get wrong-footed this year, particularly if the Fed holds off from further rate rises.


Last week was very constructive for gold. The yellow metal broke through a number of significant resistance levels and appeared to be bedding in above $1,150. This level marks the 76.4% Fibonacci Retracement of the October-December sell-off. If gold can consolidate here then the next upside target comes in around $1,180 which would mean a full 100% retracement of last year’s move.

Silver also had a good week with a notably strong rally on Wednesday. On Friday it came within a couple of cents of $15.00 per ounce and traded back up to levels last seen in early November last year. There is some mild support around $14.70 which marks the 38.2% Fibonacci Retracement of its October-December sell-off, but it looks as if it has formed a solid base around $14.30 – the 23.6% retracement of the same move.

Sentiment towards both gold and silver has improved dramatically from just a few months ago. Back in early December gold had broken below $1,050 and there was good reason to believe that it would fall further and break back below $1,000 per ounce – a level last seen when gold was surging higher back in September 2009. Meanwhile, silver had broken below $14.00 and all the signs suggested that it was heading down towards $12.00. The recent sell-off in the US dollar has undoubtedly helped to lift both metals. But technically it looks as if they bottomed out through December and January. Buyers of gold and silver have been repeatedly burnt over the past few years. But recent uncertainty over the outlook for equities and the global economy has boosted demand for two metals typically considered as safe-havens. It feels as if investors are once again choosing to hedge their bets by including at least a modest holding of gold and silver in their portfolios.


There was plenty of volatility in FX markets last week and there is probably much more to come. Ultimately, investors are focused on all the global central bank shenanigans which are currently playing out and these feed directly into the FOREX market.

Last week we saw the usual FX ebb and flow connected to the oil price. Currencies directly linked to crude (such as the Canadian dollar and Norwegian krone) moved in tandem with oil prices. But of far greater interest was the sudden sell-off in the US dollar in the middle of the week. On Wednesday the greenback suffered its biggest one-day loss in seven years.

There was no clear catalyst for the move. However the reason seems clear enough. The US dollar has been strengthening since the summer of 2014. It pulled back from its recent highs over the past couple of months, but all that has done is give dollar bulls an opportunity to take on more exposure to the greenback. After all, the fundamental driver for dollar strength has been the divergent policies of the US Federal Reserve with other global central banks. The Fed hiked rates back in December and projected a full 100 basis points of additional rises this year. Meanwhile the ECB and BOJ are actively providing additional monetary stimulus. But last week it was as if the scales dropped from investors’ eyes. Everyone woke up to the reality that (as things stand) there’s hardly any chance that the Fed will hike rates by anything like 1% in 2016. Suddenly everyone was dumping dollars. But the sudden rush to the exits which exacerbated the size of the move is further evidence that investors are getting very skittish.


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Posted by David Morrison

Category: Weekly Bulletin

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