Incisive market commentary from David Morrison

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AM Bulletin: Equities and oil slip in early trade
31 Mar 2016
PM Bulletin: Non-Farm Payroll look-ahead
31 Mar 2016
AM Bulletin: Yellen comments boost risk appetite
30 Mar 2016
PM Bulletin: Is a dovish Janet really that bullish?
30 Mar 2016
AM Bulletin: Yellen to speak
29 Mar 2016
PM Bulletin: US indices running into resistance
29 Mar 2016
AM Bulletin: Profit-taking ahead of holiday weekend
24 Mar 2016
PM Bulletin: Dollar correlations
24 Mar 2016
AM Bulletin: Equities head higher
23 Mar 2016
PM Bulletin: Melt-down in precious metals
23 Mar 2016
AM Bulletin: Markets looking for guidance
22 Mar 2016
Weekly Bulletin: US dollar on the back foot
21 Mar 2016
AM Bulletin: USD sell-off boosts oil
18 Mar 2016
PM Bulletin: A look at the S&P500 and FTSE100
18 Mar 2016
AM Bulletin: USD down on dovish Fed
17 Mar 2016
PM Bulletin: USDJPY
17 Mar 2016
AM Bulletin: All ears and eyes on FOMC
16 Mar 2016
PM Bulletin: Reaction to the “Sugar Tax”
16 Mar 2016
AM Bulletin: BOJ unchanged
15 Mar 2016
PM Bulletin: FOMC look-ahead and the USD
15 Mar 2016
Weekly Bulletin: Central banks still in focus
14 Mar 2016
PM Bulletin: Gold
14 Mar 2016
AM Bulletin: Confusion reins
11 Mar 2016
PM Bulletin: EURUSD revisited
11 Mar 2016
AM Bulletin: ECB meeting in focus
10 Mar 2016
PM Bulletin: Mr Draghi fires his bazooka
10 Mar 2016
AM Bulletin: Markets consolidate
09 Mar 2016
PM Bulletin: ECB look-ahead
09 Mar 2016
AM Bulletin: Chinese data weighs on equities
08 Mar 2016
PM Bulletin: Nasdaq 100
08 Mar 2016
Weekly Bulletin: ECB expected to boost stimulus
07 Mar 2016
PM Bulletin: FTSE making steady gains
07 Mar 2016
March: Non Farm Payrolls Out Today
04 Mar 2016
AM Bulletin: Markets quiet ahead of Non-Farms
04 Mar 2016
PM Bulletin: Meanwhile, over in silver...
04 Mar 2016
AM Bulletin: Equities consolidate
03 Mar 2016
PM Bulletin: Non-Farm Payroll look-ahead
03 Mar 2016
AM Bulletin: Equities soar
02 Mar 2016
PM Bulletin: AUDUSD chart
02 Mar 2016
AM Bulletin: See-saw day ends in losses for US equities
01 Mar 2016
PM Bulletin: Glencore
01 Mar 2016
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Week Ahead: Monday 21st March – Friday 25th March

Economic Outlook  

We’ve now heard from all the major central banks and the overall message is fairly consistent: monetary policy is set to continue to be accommodative no matter where you look in the world. Less than a fortnight ago the European Central Bank (ECB) unleashed another blast of stimulus, surprising the markets with its ferocity. Last week the Bank of Japan held back from further monetary easing but the bank’s governor subsequently made it clear that there was no reason why the negative interest rate adopted at the end of January couldn’t be lowered further, perhaps to -0.5% from its current -0.1% level. Then on Wednesday the US Federal Reserve kept its benchmark lending rate steady between 0.25% and 0.50%, after raising it by 25 basis points in December. This was expected. However, they also dialled back on how much they envisage raising short-term interest rates in 2016 and beyond, noting that the global outlook continued to “pose risks” as did financial market volatility. The news led to a dramatic sell-off in the dollar and sharp rises in precious metals and other dollar-denominated commodities. It wasn’t long before equities also joined in the broad-based “risk-on” rally which saw the major US indices trade back up to levels not seen since the end of last year. 

So this loose monetary policy is certainly having a positive effect on risk markets. But what does it tell us about the state of the world’s economy? As noted above, the Fed’s FOMC expressed concerns over global growth and financial market volatility. Surely it’s sensible to be cautious when one considers that seven years on from the nadir of the financial crisis (when the S&P500 hit that infamous intra-day low of 666) central banks are still providing monetary stimulus and have taken the extraordinary step of adopting negative interest rates? What’s more, the Fed does seem to be in a bit of a bind. Many analysts questioned the wisdom of the December rate hike when a number of critical indicators (in particular Manufacturing PMIs) were contracting and trending lower. But this time round others are asking the Fed why it has slashed its projections for future hikes when its employment goal has been met and, depending which measure one uses, inflation is at or closing in on its 2% target. Core PCE – which is the Fed’s preferred inflation measure – is now around 1.7% while on Wednesday Core CPI came out at +2.3% annualised. Fed Chairman Janet Yellen was asked about this and what it said about the central bank’s credibility in her post-statement press conference. Her reply was incomprehensible. 

This week’s major economic releases include:

Monday - JPY Bank Holiday; GBP CBI Industrial Order Expectations; USD Existing Home Sales

Tuesday - JPY Flash Manufacturing PMI, All Industries Activity; AUD RBA Governor Stevens Speaks; EUR French, German and Euro zone Flash Manufacturing PMIs and Flash Services PMIs, German Ifo Business Climate, German ZEW Economic Sentiment; GBP CPI, RPI, Public Sector Net Borrowing; USD Flash Manufacturing PMI, Richmond Manufacturing Index

Wednesday - CHF ZEW Economic Expectations, SNB Quarterly Bulletin; USD New Home Sales, Crude Oil Inventories

Thursday - EUR GfK German Consumer Climate, ECB Economic Bulletin, ECB Targeted LTRO; GBP CBI Realized Sales; USD Durable Goods Orders, Unemployment Claims, FOMC Member Bullard Speaks, Flash Services PMI; JPY Tokyo Core CPI

Friday - Bank Holiday across Europe; USD Final GDP, GDP Price Index.

Equities Outlook

On 6th March 2009 the S&P500 hit an intra-day low of 666. It rose steadily from there and on May 2015 it closed out at 2,134 – an all-time high and an increase of 220% in just over six years. It’s had a few wobbles since then – notably the China-inspired ones in the summer of 2015 and at the beginning of this year. Nevertheless, it is now back within 4% of that May 2015 high, and at the time of writing it looks entirely plausible that last year’s high could soon get taken out.

It has been an extraordinary move. This bull market is now seven years old when the average bull run over the last seventy years has lasted just over four. Yet as noted in previous commentaries, US corporate earnings have now fallen for three consecutive quarters – something which last occurred in 2009 when the global economy was suffering the aftershocks of the financial crisis. 

So the question is: how come stock prices are so strong when earnings are slipping? Part of the reason is, of course, the loose monetary policies of global central banks. Financial institutions have to put their money to work somewhere, and equities (especially dividend payers) can give a higher (if riskier) return than currently available in the bond market. 

One of the consequences of low interest rates has been the willingness of corporates to borrow funds to buy back their own stock. This has the effect of reducing the number of shares outstanding and so boosts the earnings per share which in turn can lead to a higher share price. In fact, share buybacks are proving so popular that corporations within the S&P 500 are set to purchase around $165 billion of stock in the quarter ending 31st March. This will approach the record set in2007 – just prior to the financial crisis. 

But when earnings growth starts to trend downwards, buybacks tend to dry up. If history was to repeat itself, the US stock market could be set to lose a vital support. 

Commodity/ FX Outlook


The rally in crude oil continued last week and gained additional impetus following the Federal Reserve meeting. The FOMC delivered a surprisingly dovish outlook. There had been no expectation of another rate hike to follow on from December’s. However, it was generally accepted that the Fed would counter this with upbeat comments about the US economy. After all, inflation is rising and unemployment is below the central bank’s target. But this wasn’t to be. The Fed voiced concerns over the global economic outlook and financial market volatility. This led to a sharp sell-off in the US dollar and a surge in the oil price. 

At the end of last week both Brent and WTI were trading well north of $40. If both contracts can consolidate above $42 then $44 is the next level of resistance to overcome (support comes in around $38). WTI is now up over 60% since its intra-day low around $26 on 11th February. Brent is up over 40% over the same period but has risen 56% since its low point on 20th January this year.

Both contracts have been driven higher by a wave of short-covering which has morphed into fresh buying as resistance around the mid-30s got broken. There are still plenty of concerns over the ongoing supply glut and falling demand growth. Recent estimates suggest that surplus daily production is running at 1.9 million barrels. However, investors continued to add to their long-side exposure following the announcement that a fresh date had been set for a meeting to discuss a production freeze. Producers are set to gather in Qatar on 17th April with Qatari oil minister Mohammed Bin Saleh Al-Sada claiming that around 15 OPEC and non-OPEC producers (but not Iran) support a production ceiling.

Gold/ Silver

Gold fell sharply at the beginning of last week breaking below $1,240 – a level that had held as support in early March and that acted as resistance for the second half of February. The sell-off was linked to the US dollar which had begun to tick higher. But the precious metal soared on Wednesday following the release of the Federal Reserve’s rate decision and statement, and the release of the FOMC’s latest summary of economic projections. These were considerably more dovish in tone than anticipated and triggered a sharp retreat in the US dollar. The corresponding bounce in silver was even more pronounced. Not only that but the upside momentum extended into Thursday and Friday as well. The rally took silver back above $16 per ounce at one stage – a level not seen since the end of October last year. Back then the two precious metals were making gains due to their “safe-haven” status as the Chinese-inspired turmoil of the summer continued to rattle investor confidence. Silver hit a multi-month high of $16.36 but subsequently crashed back below $14 in December. Gold dropped around 3% over the same period.

This time round the rally in the two precious metals appears to have firmer foundations. Global central banks continue to ease monetary policy with more adopting negative interest rates. At the same time the Federal Reserve has rowed back on its predictions for future tightening, despite a pick-up in inflation and concerns over the global economic outlook and market volatility. Add in the weakening US dollar and there are some decent underpinnings for precious metals going forward. Nevertheless, we should expect increased volatility and sharp price swings in both directions.


The US Dollar Index fell for the third consecutive week. The greenback’s softness was particularly apparent against the euro but also showed up against the Japanese yen. The dollar is up just under 7% against the euro since the beginning of December. This marked the time when the ECB disappointed the markets when it announced a smaller-than-expected addition to its monetary stimulus programme. It more than made up for this a fortnight ago, but by then the dollar was already well on its way down off its best levels. It’s been a similar story where the USDJPY is concerned. Only this time the dollar has dropped just under 10% over the same period. 

Last week’s Federal Reserve meeting appeared to put the icing on the cake as far as a weaker dollar was concerned. The Fed’s FOMC was significantly more dovish and downbeat than expected and this led to a sharp sell-off in the greenback. Now this has a few positive aspects: firstly, it helps to support the oil price which should give US shale oil operators (and their lenders) a lift. Secondly, it should give US exporters and multinationals a boost as the cheaper dollar should boost revenues and earnings. Thirdly, the cheaper dollar helps out emerging market countries who have taken on large amounts of dollar-denominated debt. And finally, a weaker dollar helps out China too, given the USDCNY peg.

However, the weaker dollar is an absolute disaster for Japan, and not very good for the Euro zone either. The BOJ is desperate to weaken the yen in order to encourage exports and also to stave off deflation. It thought that the adoption of negative interest rates would do the trick, but the yen strengthened instead. Likewise, the euro moved the wrong way following the ECB’s monetary stimulus bazooka. 

So it must be a frustrating time to be a central banker, particularly when the only conclusion one can draw from the behaviour of FX markets is that outright monetary stimulus is no longer proving effective.

*Prices are accurate at time of writing


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Posted by David Morrison

Category: Weekly Bulletin

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