NEWS AND ANALYSIS

Incisive market commentary and expert opinion

Stay ahead with our market commentary and webinars from our in house market strategist

Open a Live AccountOpen a Demo Account
 
+ Show blog menu

Categories

Menu

Expand 2017 <span class='blogcount'>(254)</span>2017 (254)
Collapse 2016 <span class='blogcount'>(483)</span>2016 (483)
Expand December <span class='blogcount'>(23)</span>December (23)
Expand November <span class='blogcount'>(41)</span>November (41)
Expand October <span class='blogcount'>(37)</span>October (37)
Expand September <span class='blogcount'>(41)</span>September (41)
Expand August <span class='blogcount'>(52)</span>August (52)
Expand July <span class='blogcount'>(38)</span>July (38)
Expand June <span class='blogcount'>(42)</span>June (42)
Expand May <span class='blogcount'>(42)</span>May (42)
Expand April <span class='blogcount'>(45)</span>April (45)
Expand March <span class='blogcount'>(41)</span>March (41)
Expand February <span class='blogcount'>(42)</span>February (42)
Collapse January <span class='blogcount'>(39)</span>January (39)
PM Bulletin: Gold
29 Jan 2016
AM Bulletin: BOJ takes rate negative
29 Jan 2016
PM Bulletin: BOJ in focus
28 Jan 2016
AM Bulletin: FOMC disappoints, but earnings offer support
28 Jan 2016
PM Bulletin: Facebook reports after the close
27 Jan 2016
AM Bulletin: Crude still driving equities
27 Jan 2016
PM Bulletin: Tomorrow’s FOMC meeting
26 Jan 2016
AM Bulletin: Equities slide on crude sell-off
26 Jan 2016
PM Bulletin: Silver chart
25 Jan 2016
Weekly Bulletin: Promise of further stimulus halts equity slide
25 Jan 2016
PM Bulletin: EURUSD chart
22 Jan 2016
AM Bulletin: Equities rally on ECB and oil
22 Jan 2016
PM Bulletin: Dovish Draghi triggers euro sell-off
21 Jan 2016
AM Bulletin: ECB meeting in focus
21 Jan 2016
PM Bulletin: Crude makes fresh multi-year lows
20 Jan 2016
AM Bulletin: Stocks slide as oil slumps
20 Jan 2016
PM Bulletin: Bank of Canada rate decision
19 Jan 2016
AM Bulletin: Equities surge on relief rally
19 Jan 2016
PM Bulletin: Crude oil - long-term charts
18 Jan 2016
Weekly Bulletin: China and oil weigh on equities
18 Jan 2016
PM Bulletin: Long-term gold bullion chart
15 Jan 2016
AM Bulletin: More woe from China
15 Jan 2016
Holiday Schedule: Martin Luther King Day Monday 18th January 2016
14 Jan 2016
PM Bulletin: Equities: bull or bear?
14 Jan 2016
AM Bulletin: Investors remain jittery
14 Jan 2016
PM Bulletin: The Bank’s rate decision
13 Jan 2016
AM Bulletin: Oil rebound lifts stocks
13 Jan 2016
PM Bulletin: Saudi Aramco’s IPO
12 Jan 2016
AM Bulletin: Crude closes in on $30
12 Jan 2016
PM Bulletin: US Fourth Quarter Earnings Season
11 Jan 2016
Weekly Bulletin: 2016: Trouble ahead?
11 Jan 2016
January: Non Farm Payrolls Out Today
08 Jan 2016
PM Bulletin: Another blow-out payroll number
08 Jan 2016
AM Bulletin: China effect calms markets
08 Jan 2016
PM Bulletin: Non-Farm Payroll look-ahead
07 Jan 2016
AM Bulletin: Equities slump after 2nd China trading halt
07 Jan 2016
AM Bulletin: Investors remain jittery
06 Jan 2016
AM Bulletin: China steadies and Europe rallies
05 Jan 2016
AM Bulletin: Chinese equities plunge
04 Jan 2016
 
 
 

 

Week Ahead: Monday 25th – Friday 29th January

Economic Outlook 

Stock markets continued to fall for most of last week. Every rally attempt was met by selling and the major indices struggled to find a solid level of support. What became apparent, however, was that the Chinese stock market was becoming less of an influence. While the plunge in China’s Shanghai Composite rattled investors worldwide last summer and again in the New Year, it began to feel as if the broad sell-off in global equities had gathered its own momentum. Investors found plenty of other reasons to dump stocks in Europe and the US. The collapse in the price of oil and other industrial commodities is certainly the headline factor. But there are also fears that equities are overpriced, that the US Federal Reserve made a big mistake when it hiked rates last month, that the dollar will continue to strengthen, that there are severe problems in the high yield (junk) bond market (exacerbated by the dollar and oil), that emerging market countries will struggle to pay back dollar-denominated debt, that there is just too much debt in both the private and public sectors in developed countries and deflationary pressures and low growth mean that this will be difficult to service, repay or refinance.

But then the selling dried up. On Thursday the ECB signalled its readiness to loosen monetary policy further. It said that market and geopolitical risks have increased since the beginning of the year and that interest rates should stay at (or below) current levels for some time. This opens up the prospect of an additional cut to the Deposit Rate (what the ECB charges banks for lodging excess reserves with them). The Governing Council also noted that the inflation outlook is considerably lower than it was in early December. But most significantly, the Council said it would review and perhaps reconsider its stance on monetary policy when in next meets in March. This suggests an increase to the ECB’s monthly bond purchase programme. Investors were wrong-footed last month when the central bank under-delivered compared to market expectations. The feeling is that Draghi and Co. won’t make the same mistake at their next meeting. The news stuck a rocket under risk assets and equities flew higher. Oil surged back above $30 and short-covering added to the upside momentum. The buying continued into Friday’s session buoyed by a near 6% rally on the Nikkei on speculation that the Bank of Japan is ready to announce further stimulus measures when it meets at the end of this week. To top it all, investors now believe that the recent market ructions will lead the US Federal Reserve to back-pedal from last month’s projection of a full 100 basis points-worth of rate hikes over the rest of this year.

So yet again, investors feel they can relax as central bankers promise to intervene and provide stimulus whenever there’s a wobble in financial markets. The trouble is that after seven years the evidence shows that continuous intervention brings diminishing returns.

This week’s major economic releases include:

Monday - AUD Bank Holiday; EUR German Ifo Business Climate, German Buba Monthly Report; GBP CBI Industrial Order Expectations

Tuesday - USD S&P/CS Composite-20 HPI, Flash Services PMI, CB Consumer Confidence, Richmond Manufacturing Index

Wednesday  - AUD CPI, NAB Business Confidence; USD New Home Sales, Crude Oil Inventories, Federal Funds Rate, FOMC Statement.

Thursday - EUR German Prelim CPI, Spanish Unemployment Rate; GBP Prelim GDP; USD Durable Goods Orders, Unemployment Claims, Pending Home Sales; JPY Tokyo Core CPI, Household Spending, Unemployment Rate, Prelim Industrial Production

Friday - AUD PPI; JPY Monetary Policy Statement, BOJ Outlook Report, BOJ Press Conference; CHF KOF Economic Barometer; EUR Spanish Flash CPI, Spanish Flash GDP, M3 Money Supply, CPI Flash Estimate; USD Advance GDP, Chicago PMI, Consumer Sentiment, Inflation Expectations.


Equities Outlook

Many analysts have said recently that the Chinese stock market sell-off is relatively unimportant. They point out that it is dominated by retail speculators rather than long-term institutional investors such as pension funds. Certainly, it appears that listing on the Shanghai exchange is akin to cashing in casino chips rather than raising investment capital. This is hardly surprising. China’s capital markets have yet to mature, and the authorities are too ready to intervene (in a cack-handed fashion) whenever cracks appear. But when they have made mistakes it’s probably because they have copied what’s been going on in US markets over the past twenty years.

At the end of last week China's Vice President Li Yuanchao signalled that Beijing would keep intervening in its stock market and vowed to “look after” investors. He also said that the authorities had no intention of further devaluing the yuan. His statement helped to soothe nerves and give the Shanghai Composite a lift.

But there seems little doubt that Chinese policymakers want a cheaper yuan. But they have to manage the decline to ensure that it doesn’t look like a one-way bet. Otherwise all the speculation would be on the short-side with the danger of a disorderly decline and a dangerous exodus of capital. China’s policymakers aren’t renowned for their subtlety so we can expect some surprises on the USD/yuan fix over the coming year.

At the moment, investors have pushed these concerns onto the back-burner as they cheer the prospect of further central bank intervention. At the time of writing it looked as if the Dow would end the week back above 16,000 and the S&P well clear of 1,870. If they can hold above these levels and if various central bankers continue to jawbone and keep alive the hopes of additional stimulus, then equities have a chance to build on last week’s bounce.

Commodity/ FX Outlook


Oil

At the end of last week crude oil flew higher and broke back above $31 per barrel. The initial catalyst was the ECB’s dovish statement on Thursday which convinced market participants that the bank is preparing to ease monetary policy further at its next meeting in March. Oil was also boosted by suggestions that the Bank of Japan is set to announce additional stimulus later this week (although BOJ governor Kuroda backed away from this later on Friday) and a promise from China's Vice President Li Yuanchao that Beijing would keep intervening in its stock market and would “look after” investors. Then there was the news of the cold front which is sweeping the US East Coast. The National Weather Service described the storm as "potentially crippling" for a swath of the Northeast, with snowfall exceeding two feet in some cities. Short-covering did the rest.

Despite all this the fundamental outlook hasn’t changed. Supply continues to exceed demand by a wide margin and this looks set to continue at least for the first half of this year. Meanwhile, inventories continue to grow.

At the end of last week Schlumberger was the first of the big US oil names to release earnings. The company reported a $1 billion loss for the quarter which was a touch less than expected although the company missed on revenues. The company said it was axing 10,000 jobs on top of the 20,000 already cut this year. The stock was up over 5% in early trade on Friday thanks in part to the news of a stock buy-back.


Gold/silver

My gut feeling was that last week had been a good one for gold and silver. However, a quick look at the charts reminded me how easy it is to be wrong-footed when watching the markets day by day. While both precious metals managed to tack on gains, they were certainly modest. Gold has repeatedly struggled to make any headway above $1,100. It appears to be hemmed in by its 200-day moving average which comes in around $1,105 and is acting as resistance. If it can break and hold above here then further gains look possible. However, investors aren’t yet ready to treat it as a safe-haven. If oil and equities continue to bounce back over the coming week then a retest of support around $1,080/85 looks likely.

The dynamics for silver are somewhat different. It is currently getting the benefit of being treated as an industrial rather than a precious metal. The prospect of further central bank stimulus is helping to steady equities and crude oil. The feeling is that additional monetary easing will boost demand for base metals and other commodities, particularly from China. Silver is the best thermal and electrical conductor out of all metals. Consequently, it is a small but vital component in most electrical products such as mobile phones and laptops. It is also used extensively in solar panels and its antimicrobial properties means it has a large number of medical uses as well. This is aside from its value as a precious metal and in jewellery manufacture. But silver appears to be stuck in its own trading range. It is currently probing resistance around $14.20, but a failure to break above here could soon lead to a retest of support around $13.80


Forex

Last week brought some big currency moves. The commodity currencies (such as the Canadian dollar and Norwegian krone) were particularly volatile thanks to movements in the oil price. At the end of the week the Canadian dollar and Norwegian krone both soared as crude oil finally caught a bid. Short-sellers were caught on the wrong side of sharp upside moves and were forced to cover. Currencies of oil-producing countries have been hit hard over the last eighteen months or so as crude fell relentlessly from the summer of 2014 when it was trading well above $100 per barrel.

At the end of last week all the talk was once more about central bank intervention. This began after the ECB meeting on Thursday. Mario Draghi expressed the Governing Council’s expectation that interest rates would stay at current levels or below for an extended period. He cited concerns over the economic and geopolitical situation and the fact that downside risks have increased since the beginning of the year, with heightened uncertainty over China and other emerging markets. Crucially, he said that the council would review and possibly reconsider its monetary policy stance at the next meeting in March. Speaking at Davos on Friday Mr Draghi insisted that the ECB had ‘plenty of instruments’ to revive inflation. The euro fell sharply while the dollar was generally higher.

The euro continued its decline at the end of the week thanks to a clutch of disappointing Manufacturing and Services PMIs from Germany and the euro zone. The only bright spot was French Services. The single currency also came under pressure after Goldman Sachs made a complete turnaround on its EURUSD forecast. Six weeks ago it was calling for a rise to 1.14. Now the investment bank says it expects the EURUSD to fall to 0.9500 over the next twelve months. Meanwhile sterling shot higher despite a slump in UK Retail Sales.

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


Add a comment Add comment            

 

 
© 2017 Spread Co Limited. All Rights Reserved.

Spread Co Limited is a limited liability company registered in England and Wales with its registered office at 22 Bruton Street, London W1J 6QE. Company No. 05614477. Spread Co Limited is authorised and regulated by the Financial Conduct Authority. Register No. 446677.

Spread betting and CFD trading are leveraged products and can result in losses that exceed your deposits. Ensure you understand the risks.

Losses can exceed deposits. Click here to learn more.