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PM Bulletin: Exxon Mobil - a proxy for crude?
29 Apr 2016
AM Bulletin: Equity sell-off continues
29 Apr 2016
PM Bulletin: JPY update
28 Apr 2016
AM Bulletin: BOJ disappoints
28 Apr 2016
Holiday Schedule: Early May Bank Holiday
27 Apr 2016
PM Bulletin: BOJ meeting
27 Apr 2016
AM Bulletin: FOMC in focus
27 Apr 2016
PM Bulletin: GBPUSD
26 Apr 2016
AM Bulletin: Markets directionless
26 Apr 2016
PM Bulletin: Apple
25 Apr 2016
Weekly Bulletin: Party like it’s 1999?
25 Apr 2016
PM Bulletin: Big move in USDJPY
22 Apr 2016
AM Bulletin: Weaker earnings weigh on US indices
22 Apr 2016
PM Bulletin: Silver’s pump and dump
21 Apr 2016
AM Bulletin: US indices edge closer to all-time highs
21 Apr 2016
PM Bulletin: ECB meeting look-ahead
20 Apr 2016
AM Bulletin: Silver surge drags gold higher
20 Apr 2016
PM Bulletin: Silver update
19 Apr 2016
AM Bulletin: Dow tops 18,000
19 Apr 2016
PM Bulletin: US indices continue to push higher
18 Apr 2016
Weekly Bulletin: The Fed, China, oil and the yen
18 Apr 2016
PM Bulletin: Brent crude
15 Apr 2016
AM Bulletin: Quiet start to Friday’s trade
15 Apr 2016
PM Bulletin: EURUSD chart
14 Apr 2016
AM Bulletin: Equity rally continues
14 Apr 2016
AM Bulletin: Equities push higher
14 Apr 2016
PM Bulletin: JP Morgan Chase
13 Apr 2016
PM Bulletin: Silver chart
12 Apr 2016
AM Bulletin: Equity rally runs out of steam
12 Apr 2016
PM Bulletin: Schlumberger
11 Apr 2016
Weekly Bulletin: Yen strength remains a concern
11 Apr 2016
PM Bulletin: Stock indices ending the week on a high
08 Apr 2016
AM Bulletin: “Risk-on” again as yen retreats
08 Apr 2016
PM Bulletin: JPY update
07 Apr 2016
AM Bulletin: Oil surge boosts equities
07 Apr 2016
PM Bulletin: Gold struggling to build on Q1 gains
06 Apr 2016
AM Bulletin: Firmer start for global indices
06 Apr 2016
PM Bulletin: USDJPY heading towards 110.00
05 Apr 2016
AM Bulletin: Crude weighs on equities
05 Apr 2016
Weekly Bulletin: Yellen or the data – what to believe?
04 Apr 2016
PM Bulletin: Holiday spending money
04 Apr 2016
April: Non Farm Payrolls Out Today
01 Apr 2016
AM Bulletin: Waiting for Non-Farms
01 Apr 2016
PM Bulletin: Non-Farm Payroll post mortem
01 Apr 2016
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Economic Outlook  

We’ve lost another icon. So long Prince. Are we partying like it’s 1999? If so we could be set for another hangover just like the one after the NASDAQ peaked in March 2000.

Financial markets are beginning to feel a bit jittery to me. It maybe early days, and if one just looks at the charts of the major stock indices, currencies and commodities then it isn’t something that is particularly obvious. However, here we are, seven years on from the nadir of the financial crisis with tepid growth in developed economies, deflationary fears still much in evidence and with an increasing number of central banks adopting negative interest rates and some still adding monetary stimulus. Not only that, but there is even talk of “helicopter money”, or rather we had the ECB President Mario Draghi stressing that the central bank hadn’t talked about it. If any central bank is a prime candidate for experimenting with “helicopter money” then it would be the BOJ. Last week BOJ governor Haruhiko Kuroda insisted he wasn’t considering such drastic action, citing “the existing legal framework.” But this can be changed by a simple vote so maybe something to consider for the future.

Despite an almost imperceptible wobble at the end of last week, the Dow and S&P 500 are both hovering around 2% below their all-time nominal highs from May last year. Granted, by this measure these are the two best performing of the major indices. The NASDAQ100 is 5% off last year’s high while the FTSE100 and DAX30 are still down 11% and 16% respectively. But in that hackneyed phrase that I’m so fond of using, investors/financial institutions continue to climb the “wall of worry” and are still net buyers of equities despite concerns over the state of the global economy and what’s shaping up to be another grim quarter for earnings.

Amid the stock buy-backs, non-GAAP (Generally Accepted Accounting Principles) accounting methods and other bits of financial alchemy, the prevailing certainty is that central banks will always be there to backstop the markets. Of course, this is not what central banks are for, and no central banker is ever likely to admit explicitly that they’re tracking the indices. Nevertheless, using another cliché, actions speak louder than words. Since 2009 every market wobble has been steadied by central bank interventions of one sort or another.

As I wrote last week it’s usually the quarterly Fed and ECB meetings which are when changes to monetary policy take place. The exceptions to this rule tend to be when something extraordinary happens and central bankers spring into action to dampen irrational exuberance (as in the old days) or boost investor confidence (these days). Please note I didn’t include the Bank of Japan (BOJ) in this, or the People’s Bank of China (PBOC). But last week it held true for the ECB.

This week we have meetings from both the US Federal Reserve and the BOJ. The consensus view is that the Fed will hold off from raising rates this month and so the June meeting (which will include the FOMC’s latest summary of economic projections) will remain the focus for any change in monetary policy. However, some analysts are warning against writing off this week’s meeting as a non-event. They point out that the Fed recently held two emergency meetings along with a third surprise meeting between President Barack Obama and Fed Chairman Janet Yellen. The last time this happened the Fed hiked rates less than a month later.

As to the BOJ there’s been increasing speculation that additional monetary stimulus will be forthcoming at this week’s meeting. The economy remains a basket-case. Japanese exports fell for a sixth straight month in March as slowing growth in China, soft global demand and a strengthening yen threatened to hold back the country's recovery. Exports dropped 6.8% from a year earlier while imports sank 14.9%. This resulted in the highest trade balance since October 2010. The weak numbers, together with the earthquakes which struck a southern manufacturing hub last week could give the Bank of Japan all the excuses it needs to provide further stimulus. However, the yen has weakened considerably on the back the expectation of further monetary easing with the USDJPY back above 110.00 as of Friday. The driver for this was a story that the BOJ is said to be considering applying negative rates to its institutional lending programme. In other words, banks will be “paid” for taking loans. This comes on top of speculation that the central bank will double the pace of its ETF purchases. 


This week’s major economic releases include:

Monday - EUR Italian Bank Holiday, German Ifo Business Climate; GBP CBI Industrial Order Expectations; USD New Home Sales

Tuesday - EUR German Import Prices, German Constitutional Court Ruling; GBP BBA Mortgage Approvals; USD Core Durable Goods Orders, S&P/CS Composite-20 HPI, Flash Services PMI, CB Consumer Confidence, Richmond Manufacturing Index, Treasury Currency Report

Wednesday - AUD CPI; EUR GfK German Consumer Climate, M3 Money Supply; GBP Prelim GDP, CBI Realized Sales; USD Pending Home Sales, Crude Oil Inventories, FOMC Statement, NZD RBNZ Rate Statement
Thursday - JPY BOJ Outlook Report, Monetary Policy Statement, BOJ Press Conference, Prelim Industrial Production, Household Spending, Tokyo Core CPI, Retail Sales; EUR Spanish Flash CPI, Spanish Unemployment Rate, German Unemployment Change; USD Advance GDP, Unemployment Claims

Friday -JPY Bank Holiday; EUR    French Prelim GDP, German Retail Sales, Spanish Flash GDP; GBP Net Lending to Individuals, M4 Money Supply, Mortgage Approvals; EUR CPI Flash Estimate; CAD GDP; USD Core PCE Price Index, Employment Cost Index, Personal Spending, Personal Income, Chicago PMI, Consumer Sentiment, Inflation Expectations

 
Equities Outlook

The first quarter earnings season continues to disappoint. It is on track to register the third consecutive quarter of declines in both revenues and earnings. So far investors have shrugged aside any concerns they may have about this as long as the numbers come in above analysts’ expectations. And poor results have already been factored in. No matter how weak earnings and revenues are projected to be by the companies themselves, analysts routinely predict something worse. As a consequence, the reported numbers would have to be appalling to fail to beat the consensus expectations.

These better-than-expected results have helped to drive the Dow and the S&P500 back within 2% of their all-time highs. Yet the deeper we get into this earnings season, the more concerning the numbers look. We started with the four biggest US banks by market capitalisation. All four posted earnings and revenues below those for the same period last year, but rallied as they beat expectations. But Goldman Sachs didn’t. Then last week we had some notable misses from Alphabet (the parent company of Google), Microsoft, Starbucks, Travellers, Caterpillar and Advanced Micro Devices.

Next week we have to look out for results from Amazon, Apple, AT&T, Baidu, Baker Hughes, BP, eBay, Eli Lilly, Exxon Mobil, Facebook, Ford, Halliburton, LinkedIn and Twitter. 

 
Commodity/ FX Outlook


Oil

Last week Brent and WTI hit their highest levels since November last year. Both contracts rallied strongly despite a number of factors which, in the usual run of events, should have sent them lower. Firstly, crude rose along with the US dollar. Typically, dollar-denominated commodities fall in price when the greenback rises as they become more expensive for buyers outside the US dollar bloc. Now this isn’t a perfect inverse correlation, but it does work over time. It makes me wonder which one is out of sync. Do oil traders see the dollar rally as a temporary move, or are there too many investors out there who believe crude is heading back to $60 or beyond? Secondly, the abject failure of the OPEC/non-OPEC oil producers’ meeting in Doha should have seen oil head lower. There was no output freeze and the meeting highlighted worsening relations between two key OPEC members – Saudi Arabia and Iran. The oil worker strike in Kuwait helped to offset the disappointment from Doha, but this was resolved after three days, yet still crude headed higher. The most ridiculous excuse for a jump later in the week was a report that OPEC and non-OPEC producers were preparing to meet again next month to discuss an output freeze. Russia came out very quickly to say that not only was an additional meeting not taking place, but also, according to Russian energy minister Alexander Novak it was doubtful “…that OPEC countries will reach an agreement among themselves.”

So, crude is rallying because the momentum is to the upside and with the buyers. Yet looking at a weekly chart the trend is still down. It will continue to be so unless Brent breaks convincingly above $47 and WTI above $45. From a fundamental perspective, traders need to refocus on the supply and demand picture. The latest report from the International Energy Agency (IEA) noted that supply/demand rebalancing was already taking place. The IEA said that falling US production and a drop in output from other non-OPEC producers would help the oil market "move close to balance" in the latter half of 2016. But as prices pick up mothballed production comes back on line. In addition US shale producers will take advantage of higher forward prices to hedge future supply. 


Gold/ Silver

Gold pushed higher last week and spent most of its time above $1,240 – a level which has served as both support and resistance this year. The metal appears to be consolidating once again and continues to trade in a relatively narrow range since rallying around 15% in three weeks from mid-January this year. That was an impressive move given that gold was languishing at multi-year lows in mid-December. Back then many commentators speculated that it was set to break below $1,000 with $800 being a reasonable downside target. Last week’s rally was relatively modest. Nevertheless it came despite a sharp rally in the US dollar. Typically investors rush to sell gold when the dollar strengthens. Chart-wise the price action looks constructive with a gently upward-sloping trend line in evidence. However, there is some resistance around $1,250 which gold needs to take out convincingly to make further gains.

But silver was last week’s star performer. On Thursday morning it soared 4% to hit a fresh 11-month high, although there then followed a vicious sell-off which drove silver 5% lower in less than an hour. Silver has been back in favour this year following a protracted five-year sell-off which corresponded to a prolonged rally in the US dollar. Previously silver suffered thanks to its dual capacity as both a precious and industrial metal. It got caught up in the commodity rout that happened as a consequence of the strengthening dollar and fears of the Chinese slowdown. Silver is used in numerous industrial processes as it has the highest electrical and thermal conductivity known for any metal. It is used in all manner of electrical devices such as laptops and smartphones. It is also a major component of solar panels and is used extensively in medical products – the latter due to its antimicrobial properties.

While concerns over China persist, silver is now benefiting from its status as an investment metal along with gold. Both precious metals should continue to find favour in an environment where many central banks have adopted negative interest rates. These reduce the opportunity costs of holding precious metals. There’s less of an issue in owning non-interest earning assets if there’s no interest to be earned on bonds or cash.  


Forex

I’ve been banging on for a while now about how I felt it was the US dollar’s turn to weaken. Looking back, the greenback strengthened sharply from the summer of 2014 through to the first quarter of 2015. The EURUSD lost around 25% of its value from May 2014 when it came within half a cent of 1.4000 to March 2015 when it broke below 1.0500. Despite calls for the pair to head to parity or lower, the EURUSD managed to recover for most of 2015 before selling off again in the last quarter. In December it once again broke below 1.0500 but it subsequently rallied. It bounced off its lows after the European Central Bank (ECB) disappointed the markets by providing less fresh monetary stimulus than expected at its 3rd December meeting.

Less than two weeks ago the EURUSD made an intra-day high of 1.1465 – its best level since October last year. But it has pulled back since then. At the time of writing it is hovering around 1.1260 – a level which marks the 61.8% Fibonacci Retracement of its August-December sell-off. A significant break below here would suggest that the euro is set to weaken further and that the dollar will strengthen once again. That could certainly happen if this week’s FOMC statement from the Federal Reserve meeting points to a willingness to tighten monetary policy in June. Chart-wise, this would mean that far from the dollar weakening further (which would lift dollar-denominated commodities such as oil and precious metals) it could strengthen once again. It would also mean that the EURUSD price movement remains (for the most part-ignoring the summer break-out on the Chinese stock market meltdown and yuan devaluation) contained within a range: 1.1450 to the upside and 1.0500 on the downside.

Related to this is the USDJPY. Again, the dollar has strengthened appreciably over the last two weeks. But this move is a countertrend move given the depreciation of the pair since June 2015. Last week the USDJPY broke back above 110.00 which will be some relief not only to the Bank of Japan, but also to buyers of “risk assets” such as equities. As dealt with before, the yen is the main funding currency for leveraged risk takers given its low borrowing costs and deep liquidity. A stronger yen is very bad news for Japan as its economy continues to battle with tepid growth and low inflation. It is particularly worrying as Japan’s policymakers have taken unprecedented fiscal and monetary measures to weaken the currency. The yen has weakened ahead of this week’s BOJ meeting in anticipation of further stimulus. But there is a feeling that such measures are proving increasingly ineffective. The danger for Thursday is that the yen resumes its rally even if the central bank loosens monetary policy further. This would mean that investors have lost confidence in the BOJ’s ability to stimulate Japan’s economy. This could create a crisis not just for the BOJ but for central banks in general.

*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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