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31 Aug 2016
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31 Aug 2016
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30 Aug 2016
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30 Aug 2016
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26 Aug 2016
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26 Aug 2016
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25 Aug 2016
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25 Aug 2016
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25 Aug 2016
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24 Aug 2016
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23 Aug 2016
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23 Aug 2016
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23 Aug 2016
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22 Aug 2016
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22 Aug 2016
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19 Aug 2016
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19 Aug 2016
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18 Aug 2016
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18 Aug 2016
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17 Aug 2016
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17 Aug 2016
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16 Aug 2016
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16 Aug 2016
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15 Aug 2016
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15 Aug 2016
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15 Aug 2016
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12 Aug 2016
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12 Aug 2016
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11 Aug 2016
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11 Aug 2016
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10 Aug 2016
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10 Aug 2016
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09 Aug 2016
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09 Aug 2016
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08 Aug 2016
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05 Aug 2016
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02 Aug 2016
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02 Aug 2016
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Monetary policy driving investor behaviour
01 Aug 2016
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Week Ahead: Monday 15th – Friday 19th August


Economic Outlook 

Last week all three of the top US stock market barometers (the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite) closed out at fresh all-time highs. The last time this happened was in December 1999 when the “Dot Com” boom was in full swing and other global indices were also hitting new records. Indeed, the FTSE 100 made its own all-time intra-day high on 30 December 1999 at 6,950 – not a million miles away from last Friday’s close.

The current rally is another leg up in what many analysts and traders have called “the most hated bull market in history”. But there’s no reason why this low volume summer “melt-up” can’t continue. Waves of monetary and fiscal stimulus continue to find their way into equity and bond markets and we now have the unusual situation of both investments trading at all-time highs. The European Central Bank, Bank of Japan and now the Bank of England have effectively backstopped government and corporate debt markets as they extend their bond purchase programmes in a desperate attempt to boost growth and goose inflation towards their respective 2% targets. Meanwhile, the Federal Reserve just can’t bring itself to pull the trigger on a measly 25 basis point rate hike. As far as the markets are concerned, there’s little chance of the US central bank tightening monetary policy before December – no matter what Fed members say to the contrary. The US central bank really isn’t in a hurry to risk a market disruption (like the one that followed its rate hike at the end of last year) just ahead of the US Presidential Election in November. So what this suggests is that we could now go through to December with the federal funds rate stuck in its target range of 0.25-0.50%.

But even if the fed funds futures market assigns little probability to a September rate hike, that won’t stop traders reacting to each and every significant data release. We began the month with a particularly strong Non-Farm Payroll number which put a firm bid under equity markets. Yet Friday saw the US indices sell off (and precious metals shoot higher) after headline Retail Sales came in unchanged in July, while the core number (which excludes autos) fell 0.3% from the previous month. Employment has been a bright spot amongst the data releases. But there are signs elsewhere that in other respects the US isn’t exactly firing on all cylinders. A case in point is second quarter GDP which rose just 1.2% annualised on expectations of a 2.6% increase. Meanwhile both the ISM Manufacturing and Non-Manufacturing PMIs slipped a touch in July which doesn’t bode well for the future. So the market may be getting used to the idea of “lower rates for longer.” But that prospect may not be enough to push it that much higher if US data points to problems elsewhere.

This week’s major economic releases include:

Monday

JPY Preliminary GDP, Revised Industrial Production; EUR French Bank Holiday, Italian Bank Holiday; USD Empire State Manufacturing Index, NAHB Housing Market Index, TIC Long-Term Purchases

Tuesday

AUD Monetary Policy Meeting Minutes, New Motor Vehicle Sales; GBP CPI, RPI, HPI, 30-year gilt auction; EUR German ZEW Economic Sentiment, Euro zone ZEW Economic Sentiment; CAD Manufacturing Sales; USD CPI, Building Permits, Housing Starts, Capacity Utilization Rate, Industrial Production; NZD Unemployment Rate, PPI

Wednesday

AUD Wage Price Index; GBP Unemployment Rate,  Claimant Count Change, Average Earnings Index; USD Crude Oil Inventories, FOMC Meeting Minutes

Thursday

JPY Trade Balance; AUD Employment Change, Unemployment Rate; GBP Retail Sales; EUR CPI, ECB Monetary Policy Meeting Accounts; USD Philly Fed Manufacturing Index, Unemployment Claims

Friday

GBP Public Sector Net Borrowing; CAD CPI, Retail Sales

 Equities Outlook

The second quarter earnings season is pretty much done and dusted now. Looking at the S&P500 it would be a miracle/mathematical impossibility for the few corporations left to report to alter the main takeaway. That is, this is set to be the fifth consecutive quarter of year-on-year earnings declines, marking the longest back-to-back series of negative comparisons since the financial crisis of 2008/2009. It’s looking a touch better for revenues which are set to come in flat when compared to the same time last year. If they do, then this will be the best year-on-year comparison for revenues since the fourth quarter of 2014.

Ahead of this reporting season analysts were predicting that S&P500 earnings would show a modest pick-up year-on-year in the third quarter. However, the consensus forecast has now been revised downwards. Earnings for next quarter are now expected to decline by 1.7% when compared to the same period last year.

But it seems that any concerns investors may have about the health of US corporations have been trampled on by fears of missing out on a stock market rally that began back in March 2009. This rally, often described as the most hated bull market in history, continues to pull in investors/speculators desperate for returns in a zero/negative interest rate world.

The catalyst for this rally was the unprecedented monetary and fiscal stimulus which was hosed into global financial markets during a time of complete panic. But that was then and this is now. Here, over seven years on from the nadir of the crisis, major global central banks continue to cut interest rates, not just to the bone, but below zero. This monetary stimulus means that large corporations have access to cheap loans and debt. The largest corporations can borrow at low rates and invest in new equipment, expand plant and generally do all those things to help boost productivity and profitability. But they don’t want to do that. Why? Probably because they don’t see demand increasing enough to warrant the investment, even at near-zero interest rates. Instead, companies borrow to purchase their own shares. US corporations have spent over $2.5 trillion on stock buy-backs since 2009. Not only does this support the stock price, but it also reduces the absolute number of shares outstanding for other investors to trade. This boosts the company’s earnings per share, helps executives hit stock targets and thereby pocket bonuses even if there’s no actual growth in revenues and earnings.

But there is evidence that stock buy-backs are in decline. Business Insider magazine reckons they fell 18% in the second quarter. With all the major US stock indices hitting fresh record closing highs last week, maybe even corporate executives are concerned about buying at the top of the market. Of course, this rally could go on a lot further from here, but the uncertainty over the outcome of the US Presidential Election, together with speculation over the timing of a Federal Reserve rate hike may put the brakes on soon.

Commodity/ FX Outlook

Oil

The fierce short-covering bounce-back in oil continued last week. As usual traders reacted to the three separate sets of weekly US crude inventory updates. But last week there was also fresh speculation about producers putting their heads together to discuss an output freeze. The balloon was initially floated by OPEC members Venezuela, Ecuador and Kuwait. However, this began to deflate quite quickly. Firstly, these three countries lack the clout of other OPEC members (Saudi Arabia, Iran and Iraq in particular) who seem determined to pump and sell as much oil as they can suck out of the ground. Outside of OPEC, Russia (which vies with Saudi for the title of world’s biggest oil producer) also poured scorn on the plan. Secondly, investors cast their minds back to a time earlier this year when fevered speculation of an output freeze came to an abrupt halt as talks in Doha broke down in acrimony. But last Thursday the Saudi oil minister appeared to back the proposal. Khalid al-Falih said that the International Energy Forum, a group of major oil producers and consumers, would consider the oil market situation at meetings due to take place next month in Algiers. He also said that Saudi Arabia would work with OPEC and non-OPEC producers to help rebalance the market if necessary. Logically, this sounds like rubbish. However, it proved to be just the kind of news that buyers were looking for. There was a sharp short squeeze in oil which saw Brent and WTI fly back above key technical levels of $44 and $42 respectively.

Earlier in the week the International Energy Agency (IEA) warned that global demand for oil was likely to fall by 100,000 barrels per day to 1.2m barrels. The agency blamed the UK’s decision to leave the EU for their gloomier economic outlook. Yet the IEA also predicted that crude markets would rebalance in the next few months, with oil stocks expected to decline in the third quarter of this year for the first time in more than two years.

Taken together, it could be that we’re seeing nothing more than a technical correction in crude prices. Looking at the chart of front-month WTI, oil retraced 50% of its Feb-June rally when it fell below $40 earlier this month. The next obvious area of resistance comes in around $45.60/80 which marks the 23.6% Fibonacci Retracement of the rally earlier this year. If it breaks above here convincingly then it could head back above $50. But a failure here suggests that the downside move from early June could have further to go.

Gold/Silver

By Friday afternoon both gold and silver were on track to post modest losses for last week. The two metals came under pressure (despite a weaker dollar) as investor risk appetite helped to drive US stock indices to fresh record all-time highs. As money chased equities higher, there was less interest in safe haven plays such as precious metals. However, gold and silver made back a fair proportion of losses from earlier in the week following the release of US Retail Sales data on Friday. Core Retail Sales (which excludes autos) fell 0.3% from the prior month. The headline number was flat. The July data represented a big fall from the previous month and was well below the consensus expectations. The news took some of the gloss off the ongoing equity market rally as investors worried about what the data said about the strength of the US economy. While there was good news on employment earlier in the month, the first look at second quarter GDP was well below market expectations.

Figures last week from the World Gold Council (WGC) showed that investor appetite for gold remains strong. Investment demand hit a fresh record of 1,064 tons for the first six months of the year with investors piling into Exchange Traded Funds (ETF). The WGC reported that for the second successive quarter investment overtook jewellery as the largest component of gold demand.

Precious metals should continue to get support as the world’s major central banks loosen monetary policy further. The Bank of England has now joined the Bank of Japan and European Central Bank in adding corporate bonds to the list of debt instruments it is prepared to buy in its quantitative easing programme. Meanwhile, the US Federal Reserve looks likely to hold off from tightening monetary policy until December at the earliest.

Forex

Looking at longer-term charts of the Dollar Index and EURUSD, it’s striking how the greenback has traded in a relatively narrow range over the past twelve months. If we go back to the early summer of 2014, the EURUSD was trading within a few ticks of 1.4000. It then fell sharply over the next 10 months breaking below 1.0500 in March 2015 – a big loss for the euro, representing a gain of around 25% for the greenback. The Dollar Index rose by a similar percentage over the same period. This shouldn’t be much of a surprise as the euro comprises about 58% of the currency basket. The Japanese yen comes next with a 13.6% share.

The dollar appreciation began as the US Federal Reserve signalled it was preparing to wind down its monthly bond purchase programme, or quantitative easing (QE). At the same time, European Central Bank (ECB) President Mario Draghi was desperately pushing against his more conservative colleagues on the Governing Council to persuade them that they should be launching their own version of QE. Eventually Mr Draghi prevailed and the ECB’s monthly bond purchase programme kicked off in March 2015.

Since then, the EURUSD has rarely risen above 1.1400 nor fallen much below 1.0600. In other words, it has been stuck in a range of around 8 cents, or 7.5% of the EURUSD’s March 2015 low. Yet since then the ECB has loosened monetary policy further while the Fed actually raised its key fed funds rate at the end of last year. Not only that but there’s a general expectation that the divergence in monetary policy between the two central banks is set to widen. Considering this it is perhaps surprising that the EURUSD hasn’t broken down below parity, particularly given the uncertainty for the Euro zone following the UK referendum result.

Some commentators suggest that the euro’s resilience (and the dollar’s inability to make significant gains) is connected to the G20 meeting in Shanghai which took place in February this year. There’s speculation that leaders of the world’s major economies agreed to take covert action to keep a lid on the dollar, or even push it lower. The thinking goes that it was the dollar’s appreciation from mid-2014 to early 2015 which did so much damage to commodity markets and that can’t be risked again. Most commodities are traded in dollars, so when the greenback rises they become increasingly expensive for non-dollar holders to purchase. Related to this is the position of China – the world’s second largest country by GDP. Everyone can agree that Chinese economic growth has slowed sharply over the past five years or so, even if no one can agree by how much. The Chinese yuan is pegged to the dollar so Chinese exports become less competitive as the dollar rises. So, if there is an agreement to keep a lid on the dollar, China and the US will be the major beneficiaries. Unfortunately, this does nothing to help either Japan or the Euro zone. Both are desperate to cheapen their respective currencies in order to boost growth and fight off deflationary pressures.

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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