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 it was all about “risk on” for a number of reasons. Investors reacted positively to the abrupt and unexpected resolution to the UK’s political upheavals. This time last week, in the fallout of the shock referendum result, the UK was without a Prime Minister and facing a protracted leadership contest which looked set to tear the governing Conservative party apart. Then in the space of a day the matter was settled. Theresa May became the only candidate and by Wednesday she was officially Prime Minister and sorting out her new Cabinet. Even the prospect of a fresh General Election faded, which will come as a relief to MPs of all parties not to mention a jaded UK electorate. Meanwhile, the opposition Labour party remains in complete disarray and this has only helped to distract critics from focusing on the challenges that await the new Prime Minister and her government in the months and years ahead.

All this has served to push Brexit fears onto the back hob, despite the fact that we still don’t know when Article 50 will be triggered and proper negotiations begin. After its initial post-referendum sell-off, sterling appears to be settling down with cable holding comfortably above 1.3000, for now. Meanwhile the FTSE100 is around 5% higher than it was prior to the Brexit vote. Even the broader-based, more domestically-focused FTSE250 is only down around 3% from its pre-referendum levels. That’s not to suggest that the all-clear has sounded, but as far as the markets are concerned it’s fair to say “Project Fear” was overdone.

This was acknowledged (implicitly, rather than explicitly) by last week’s decision by the Bank of England (BoE) to keep rates on hold. The Bank’s Monetary Policy Committee (MPC) stated that despite the sharp fall in sterling, markets had functioned well in the referendum’s aftermath.

Granted, the MPC made it clear that most members expect monetary policy to be loosened at the next meeting in three weeks’ time. But even that short period should help the MPC better assess the ongoing impact of the Brexit vote. In the meantime, the Committee noted evidence that businesses are delaying investment projects and postponing recruitment decisions while activity in housing has also slowed. This downturn could prove to be persistent. But on the other hand, economic activity could pick up again now the immediate shock of the Brexit vote is behind us.

But overall the MPC felt the UK was set to experience lower growth and higher inflation as a result of its exit from the EU. This would suggest that a rate cut or an addition to the Bank’s Asset Purchase Facility was warranted next month. But it’s worth bearing in mind that further monetary easing is likely to send sterling lower and push inflation up even more. While higher inflation expectations don’t look like being a problem at the moment, the Bank will be wary of unleashing an inflation genie which can only be brought back under control with sharply higher rates.

Last week saw the Dow and S&P500 hit a succession of fresh all-time highs as investors shrugged off Brexit fears and calculated that the Fed is unlikely to hike rates this year despite a strong payroll number in June. There is also speculation that Japan is preparing to unleash unprecedented stimulus in the form of “helicopter money” as discussed by ex-Federal Reserve head Ben Bernanke earlier this century.

Yet this has to be one of the most hated bull markets in history. The current rally is distrusted by so many, although investors searching for some kind of investment return are heading for equities as yields on all manner of bonds are either negative or not worth a candle. There is a feeling that investors will eventually have no choice but to pile back into a booming stock market in a desperate attempt for the returns offered by dividends and capital returns. But two points to make: bonds are generally considered a safe investment. In normal circumstances you are paid interest (yield) and get your money back on maturity, at the end of the bond’s term. With equities you bet that the share price will rise, so you could get back more than your original investment. But there’s no guarantee. The company may underperform or even go bust. The other point is that last week’s rallies in US indices came despite a slump in trading volumes. According to “Hedgeye’s” commentary from last Tuesday:

"Take a look at volume the last two trading days... Market and Total exchange volume on Friday was down -8% and -7% vs. 1-month averages on Friday and yesterday volume was much lighter still. Total market volume was down -24% vs. 1-month averages and total exchange volume was down -19% vs. 1-month Averages showing the lack of breadth at all-time highs and cycle high market multiples."

It’s time to be cautious.

This week’s major economic releases include:


JPY Bank Holiday; USD NAHB Housing Market Index, TIC Long-Term Purchases


AUD RBA Monetary Policy Meeting Minutes, HPI; GBP CPI, RPI, PPI Inputs, FPC Statement; EUR German ZEW Economic Sentiment, Euro zone ZEW Economic Sentiment; GBP Inflation Report Hearings; USD Building Permits, Housing Starts


 EUR German PPI, Euro zone Current Account; GBP Average Earnings Index, Claimant Count Change, Unemployment Rate; CHF ZEW Economic Expectations; CNY CB Leading Index; EUR Consumer Confidence; USD Crude Oil Inventories


AUD NAB Quarterly Business Confidence; JPY All Industries Activity; CHF Trade Balance; EUR Spanish Unemployment Rate, ECB Rate Decision, ECB Press Conference; GBP Retail Sales, Public Sector Net Borrowing; USD Philly Fed Manufacturing Index, Unemployment Claims, Existing Home Sales, CB Leading Index


JPY Flash Manufacturing PMI; EUR French, German and Euro zone Flash Manufacturing and Services PMIs; CAD CPI, Retail Sales; USD Flash Manufacturing PMI.

Equities Outlook

The second quarter US earnings season got underway last week. Although it is early days, investors have reacted positively to the few major corporations that have reported so far.

Yum! Brands (the parent company to KFC, Pizza Hut amongst others) reported after Wednesday’s close. The company had a mixed second quarter. Earnings came in at $0.75 per share, slightly above the $0.74 expected. But the company missed on revenues which came in at $3.01 billion against £3.09 billion expected. Nevertheless, the stock rallied on the news.

On Wednesday JP Morgan (JPM) posted a strong set of second quarter numbers. The US banking giant reported earnings per share of $1.55 which was way above the $1.43 consensus estimate. Revenues came in at $25.2 billion on expectations of $24.16 billion.

On Friday Citigroup (C) reported earnings per share of $1.24 with revenues of $17.55 billion. This compared with consensus expectations of $1.10 and $17.47 billion respectively.

Wells Fargo (WFC) also reported on Friday. The bank matched the consensus earnings forecast which came in at $1.01 per share. However, revenue for the second quarter came in at $22.16 billion which was a touch below the $22.17 anticipated.

However, it’s worth noting that so far earnings and revenues are down on the same period last year. US stock indices may be trading at record highs, but the earnings and revenue recession carries on.

Commodity/ FX Outlook


Just over a month ago Brent and WTI had both broken above $50 per barrel and appeared to be consolidating quite happily above this level. This meant that oil prices had effectively doubled since the beginning of the year following a slump which began in June 2014 and led to both contracts losing around 80% of their value from high to low.

This year’s rally came as analysis suggested that supply and demand were coming back into balance far quicker than previously calculated. Future demand growth was seen as steady or rising as the prospects for global economic growth improved while there were signs that crude output was falling sharply as a result of lower prices. This was particularly the case where US shale oil was concerned as producers were forced to shut down production and mothball loss-making rigs. Oil prices also got a lift on the expectation that OPEC and non-OPEC producers were ready to agree to an output freeze which would cap production at January levels. The fact that such a cap (as opposed to a production cut) would have little effect in running down record-high inventories was largely ignored. The fact that the participants in the talks which took place in Doha in April broke down without agreement also failed to halt crude’s rally. But there had to be a correction following crude’s dramatic price collapse and the rally which took oil back above $50 seemed to be it. The issue now is whether prices are now consolidating ahead of another leg higher or if the rally is over.

Last week brought another small rise in the US rig count as higher prices encouraged US shale producers to restart mothballed facilities. But that’s probably just a minor consideration as a sell-off in crude would see these rigs shut down just as quickly as they restarted. Nevertheless, a rising rig count could have been a catalyst for traders to trim back long positions. But of more importance last week was data from both the American Petroleum Institute (API) and Energy Information Administration (EIA) which both showed builds in US inventories. Then the International Energy Agency (IEA) said that OPEC’s oil production climbed to an eight year high in June with total output up 400,000 bpd to more than 33 million bpd. The agency also said that while supply and demand were mostly in balance in the second quarter, there was a persistent glut in stockpiles which could cap prices. The IEA went on to say that there were some signs that demand growth was slowing a touch which should also help to keep a lid on the oil price.

It is this outlook for demand which may prove to be pivotal in deciding the future direction of oil prices. The IEA’s warning of a slowdown is worth taking seriously, as it comes after a long period of bullishness. While it’s probable that the UK’s vote to leave the EU will impact on economic activity to some extent, the outlook for global economic growth was uncertain even before the referendum. Now we’re living in a world where the US Federal Reserve unwilling to raise rates, the European Central Bank petrified over deflation and non-existent growth and all last week we’ve had speculation of Japan going all-out for “Helicopter Money”. The bottom line is that it remains an uncertain world, and it’s becoming apparent that seven years of monetary stimulus has had very little economic effect.


Gold and silver had already made impressive gains in the first quarter of this year but there were signs that rallies in both were running out of steam. But investors piled into both metals after the UK voted to leave the European Union. This was a demonstration of the uncertainty felt following the decision, both economically and politically. Gold and silver, as well as the US dollar, all benefited from the rush to pile money into safe-havens.

Last week both metals pulled back from their best levels. The safe-haven trade unwound to some extent when it became apparent that the world wasn’t coming to an end and as stock markets soared. Much of this was down to the fact that political stability in the UK was quickly re-established. On Monday Theresa May was anointed Prime Minister-elect as her only challenger for the post pulled out of the running. Suddenly, the prospect of a two month leadership campaign evaporated and markets reacted accordingly. But gold and silver have both held on to a significant proportion of their post-Brexit gains. The fact is that the UK’s decision to leave the EU still means the future is uncertain. On top of this we still have to deal with all the issues and concerns that existed prior to the referendum. This means that once again attention is focused on the world’s major central banks. It now looks as if the US Federal Reserve won’t be raising rates this year, despite the big jump in June Payrolls. At the same time, the Brexit decision increases the likelihood of looser-for-longer monetary policy (if not further stimulus) from both the Bank of England (BoE) and European Central Bank (ECB). This is despite the BoE leaving rates unchanged last week, together with the expectation that the ECB will also stand pat at this week’s meeting. On top of this the Bank of Japan (BOJ) may well increase its Quantitative and Qualitative Easing (QQE) programme when it meets at the end of this month, while Prime Minister Shinzo Abe has signalled that fiscal stimulus is on the way. Continued loose monetary policy, zero or negative interest rates around the world and an uncertain global outlook should all help to keep a bid under precious metals this year and beyond.


There were some big moves in FX last week. Most notably sterling rallied sharply making back some of its post-referendum losses. Cable traded down to 1.2850 in early trade on Monday but it subsequently flew higher, powering above 1.3000 as it became apparent that the UK had avoided a protracted leadership contest to decide who would succeed David Cameron as Prime Minister. Prospective candidate Andrea Leadsom suddenly withdrew from the race which left Theresa May as the only remaining contender. This removed a considerable amount of political uncertainty.

Sterling got another boost after the Bank of England’s MPC overwhelmingly voted to keep rates unchanged at 0.5%. The decision surprised investors who had anticipated a 25 basis point cut. In its summary the MPC said that most Committee members felt that monetary policy would be loosened at next month’s meeting. This would give the MPC another few weeks in which to assess the economic impact of the UK’s decision to leave the European Union.

Sterling pulled back from its best levels at the end of the week and 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.

Meanwhile the Japanese yen fell sharply. The USDJPY briefly traded below 100.00 on the previous Friday but it shot higher after Japan’s ruling Liberal Democratic Party cleaned up in upper house elections. This was seen as a complete validation of Prime Minister Shinzo Abe’s three pronged approach to reinvigorating the country’s moribund economy. Now investors expect a fresh raft of fiscal and monetary stimulus together with another attempt at those all-important structural reforms. Mr Abe was quick to announce that a package of government infrastructure spending was on its way. Now investors have to wait for the next Bank of Japan (BOJ) meeting at the end of the month to see if looser monetary policy if also forthcoming. By some measures it’s certainly overdue. The BOJ last intervened in January this year when their adoption of negative interest rates backfired spectacularly as the yen soared on the announcement.

There has been extensive speculation that Japan is set to take monetary stimulus to the next level, or dialling up to 11 as Spinal Tap would have it. This is the notion of “Helicopter Money”. Unlike QE (or even QQE) where the central bank buys up bonds and feeds the resulting money into the country’s banking system, helicopter money is where the country’s treasury issues new debt (bonds) which the central bank monetises by purchasing with freshly created money. These funds are paid back to the country’s treasury and can then be used by the government to pay for massive infrastructure projects and the like. Bloomberg described it as “the equivalent of turning the central bank into a giant ATM to underwrite aggressive fiscal measures”.

But there may be a problem. ZeroHedge wrote last week (via Reuters) that Japanese government and central bank officials directly involved in policymaking have pointed out: "Adopting helicopter money in the strict sense is impossible as it's prohibited by law". While laws can always be changed or repealed, the same officials said Shinzo Abe's administration was unwilling to revise the law and force the central bank to resort to helicopter money. There are serious concerns about the policy and what message it sends to the rest of the world and the danger that Japan could lose control of inflation. A key economic adviser to Shinzo Abe, Koichi Hamada, told the Wall Street Journal that helicopter money: “…. would be too tempting for politicians. They wouldn't give it up once you made it possible for them to print and spend as much money as they please, either for political purposes or for their own ambitions”.


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Posted by David Morrison

Category: Weekly Bulletin

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