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PM Bulletin: Exxon Mobil - a proxy for crude?
29 Apr 2016
AM Bulletin: Equity sell-off continues
29 Apr 2016
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28 Apr 2016
AM Bulletin: BOJ disappoints
28 Apr 2016
Holiday Schedule: Early May Bank Holiday
27 Apr 2016
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27 Apr 2016
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27 Apr 2016
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26 Apr 2016
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26 Apr 2016
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25 Apr 2016
Weekly Bulletin: Party like it’s 1999?
25 Apr 2016
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22 Apr 2016
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22 Apr 2016
PM Bulletin: Silver’s pump and dump
21 Apr 2016
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21 Apr 2016
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20 Apr 2016
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20 Apr 2016
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19 Apr 2016
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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
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15 Apr 2016
PM Bulletin: EURUSD chart
14 Apr 2016
AM Bulletin: Equity rally continues
14 Apr 2016
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14 Apr 2016
PM Bulletin: JP Morgan Chase
13 Apr 2016
PM Bulletin: Silver chart
12 Apr 2016
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12 Apr 2016
PM Bulletin: Schlumberger
11 Apr 2016
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11 Apr 2016
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08 Apr 2016
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08 Apr 2016
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07 Apr 2016
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07 Apr 2016
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06 Apr 2016
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06 Apr 2016
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05 Apr 2016
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05 Apr 2016
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04 Apr 2016
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04 Apr 2016
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01 Apr 2016
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01 Apr 2016
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Week Ahead: Monday 11th April – Friday 15th April

Economic Outlook  

The minutes from last month’s US Federal Reserve FOMC meeting were released on Wednesday. These confirmed a number of things. Firstly there was a split between members concerning the timing of future rate hikes. Some felt that further tightening should be considered at this month’s meeting while others wanted a delay.  But we already knew this given that five regional Federal Reserve Bank Presidents came out a week after the March meeting to indicate their support for additional tightening by June at the latest. But perhaps the most interesting takeaway from the minutes was the emphasis on “global” financial and economic developments. It was noticeable how often committee members cited global (meaning China) risks when discussing domestic monetary policy. This was along the lines that the US economy is doing fine but there are significant downside risks due to uncertainty stemming from elsewhere. Now while the US doesn’t operate in perfect isolation and therefore has to consider other economies, it is surprising that the Fed is emphasising this fact to such a degree. After all, their dual mandate is specific in that it requires the central bank to strive for price stability (controlling inflation) and maximum employment. The Unemployment Rate ticked up to 5% from 4.9% last month but can be considered close to full employment – at least as far as the Fed’s own measures are concerned. Meanwhile inflation is picking up and approaching their 2% target. February Core PCE came in at 1.7% year-on-year while core inflation is running at 2.3%. But it now seems obvious that these targets will be ignored as the Fed is scared stiff of hiking rates again and risking a severe equity and bond market sell-off. Now they have an excuse not to raise rates by citing concerns about global risk.

So the Fed looks set to keep rates unchanged through to its June meeting at the earliest. Even then the possibility of another hike seems small. As far as other major central banks are concerned, last month the ECB came up with the goods by cutting its deposit rate further and boosting its programme of monetary stimulus. But ECB President Mario Draghi suggested that that could be it for the time being. Meanwhile the Bank of Japan is in a bind. It desperately wants to halt the current yen rally but feels unable to intervene directly in the currency markets as it has done in the past. This is because it takes over as head of the G7 next month and members of G20 recently agreed not to take action to weaken their respective currencies. Nevertheless, if the yen strengthens much further with the USDJPY dropping below, say, 100.00 then it’s possible that Japan could garner some international support for some form of intervention. Otherwise Japanese policymakers will have their hands tied until 28th April when the BOJ concludes its next meeting. It seems increasingly likely that the central bank will announce further stimulus then.


This week’s major economic releases include:


Monday - EUR Italian Industrial Production

Tuesday -AUD NAB Business Confidence; EUR German Final CPI; GBP CPI, RPI; USD Import Prices; Federal Budget Balance

Wednesday -JPY PPI, M2 Money Stock; EUR French Final CPI, Industrial Production; GBP BOE Credit Conditions Survey; USD Retail Sales, PPI, Business Inventories, Crude Oil Inventories, Beige Book; CAD BOC Rate Statement

Thursday -AUD Unemployment Rate; CHF PPI; EUR CPI; GBP Official Bank Rate, Monetary Policy Summary; USD CPI, Unemployment Claims

Friday -AUD RBA Financial Stability Review; CNY GDP, Industrial Production, Fixed Asset Investment, Retail Sales; JPY Revised Industrial Production; EUR Trade Balance; CAD Manufacturing Sales; USD Empire State Manufacturing Index, Capacity Utilization Rate, Industrial Production, Consumer Sentiment, Inflation Expectations

Equities Outlook

A quick glance at the charts of some of the major global stock indices shows up a stark divergence between the US and the rest. US indices such as the Dow, S&P500 and Nasdaq100 are all within 5% of their highs hit in the first half of last year. But the FTSE is around 13% below last year’s high and is struggling to break decisively above 6,200 – a level which marks the upper band of a range that has been in place since early March. The German Dax is around 22% below last year’s high, the French CAC 18%, the Italian MIB 28%and the Spanish IBEX 29%.

The difference in performance is down to many factors, one of which is the weighting of certain stocks in a particular index. For instance, the FTSE has a heavy weighting of miners, banks and energy stocks; the DAX has a number of multinational chemical and engineering firms while the Italian index is currently under pressure from its banking sector.

But it is worth noting that the US equity markets have held up relatively well even as the US Federal Reserve tightened monetary policy. Yet European indices have struggled even as the ECB has added monetary stimulus.

Of course there’s no reason in the world for all these different indices to converge. However, it’s always possible that certain investors have been overtaken by what Alan Greenspan, when Chairman of the Fed, once described as “irrational exuberance.”

 
Commodity/ FX Outlook


Oil

Oil soared mid-week on a combination of a technical countertrend short-covering rally followed by a surprisingly large drawdown in US crude inventories. The rally helped to lift the major US and European stock indices - at least until investors woke up to the dangers inherent in the surge in the Japanese yen. On Thursday crude prices briefly dipped as markets went into risk-off mode as the yen soared. However the sell-off in crude was short-lived and prices surged higher again on Friday.

Oil continues to be extremely volatile – swinging wildly on every piece of inventory data, central banker utterance and rumours of who will agree to what at the OPEC/non-OPEC producers meeting set for 17th April in Qatar. On Friday Federal Reserve Bank of New York President William Dudley gave oil and other risk assets a boost with a dovish speech. He emphasised his concerns about “economic growth prospects abroad and how this will affect the U.S. economic outlook” and also noted that “the return of inflation to our objective could take longer than I anticipate.”

But the biggest factor that has pushed crude higher since the middle of February has been talk of an agreement between OPEC and non-OPE C producers to freeze oil output at January levels. This plan came out of a meeting between Saudi Arabia, Russia, Venezuela and Qatar. Yet following recent actions and comments from the oil-producing nations who will be attending the Doha meeting it’s difficult to see now how the biggest players, or even a majority (let alone all sides) can possibly agree to any kind of freeze. And even if they do, there’s zero chance of them sticking to it.

 The two largest producers at the meeting will be Russia and Saudi Arabia. According to Reuters Russia’s oil production is now at a 30-year high after the nation produced 10.91 million barrels per day (bpd) in March.

Earlier this month Saudi Arabia’s deputy crown prince Mohammed bin Salman told Bloomberg: "If all countries agree to freeze production, we’re ready. If there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door.” This includes Iran who, according to their Oil Minister Bijan Zanganeh, will continue to increase production and exports until it achieves pre-sanction output levels.


Gold/ Silver

Gold and silver continued to falter for most of last week. Both have fallen back sharply from the highs made in the middle of March, yet there seems to be a steady stream of buyers ready to step back in when prices dip below certain levels.

The question is if the buyers are right to pile back in to precious metals now, or are they being too optimistic in their outlook for precious metals?

Understandably, there is still evidently some caution amongst investors. It was only a few months ago that both gold and silver were trading down at multi-year lows following a precipitous decline that began in 2011. It could be that precious metals buyers are climbing their own wall of worry even as they shift their portfolios away from (possibly overvalued) bond and equity markets and increase their exposure to the relative safety of gold and silver. However, gold lost 45% of its value between its all-time nominal high above $1,900 in 2011 and its sub-$1,050 low in December last year. Silver lost over 70% in roughly the same time span so it’s understandable why there may be some reluctance to take prices much higher from current levels.

Gold has been trading sideways for almost two months now. The question is whether this is another period of consolidation ahead of a further push higher, or signs that the market has lost momentum. Buyers are right to be concerned if last year is any guide. Gold rallied strongly at the beginning of 2015 but then sold off sharply and went on to make those multi-year lows in December. However, it could be that the current negative interest environment means this time it’s different. After all, zero and negative interest rates reduce the opportunity costs of holding gold. There’s less of an issue in owning gold that doesn’t pay interest if bonds don’t either. Investors are also likely to be net buyers as they look for “safe haven” portfolio diversification. This is due to their loss of confidence in central banks to apply monetary policy effectively, together with the fear that these same central banks will adopt even more unorthodox methods in an attempt to boost inflation and economic growth.


Forex

Last week the US dollar failed to recover its mojo and remained under pressure. Nevertheless, it is hovering around significant support around 94.00 for the near-month Dollar Index while the EURUSD is butting up against technical resistance around 1.1450. The area around here has acted as an upside barrier for euro gains throughout last year. In fact, the only time the EURUSD broke above here was for a few days at the end of August – during the market turmoil caused by China’s stock market melt-down and currency devaluations. This is not to say that the euro won’t strengthen (and the dollar weaken) from here. However, it’s quite possible that markets may consolidate and we get a countertrend dollar rally. If so, then that would put pressure back on dollar-denominated commodities – in particular oil and precious metals. Yet last week’s FOMC minutes further undermined the dollar. These emphasised the committee’s concerns that global risks could negatively affect the US economy. This gives the Fed an excuse for keeping monetary policy loose even if US unemployment should continue to fall and domestic inflation pick up beyond their 2% target.

But the big story in FX last week was the surge in the Japanese yen. On Thursday the USDJPY broke below 108.00 – its lowest level since the BOJ expanded its monetary stimulus programme in October 2014. Japanese policymakers made attempts to jawbone the yen lower and the currency did pull back from its highs. But any fall in the yen could prove temporary and it appears that the authorities are reluctant to intervene directly to halt the yen’s rise. This is because Japan takes over the chairmanship of G7 next month where members have said they won’t intervene to weaken their respective currencies. However, as noted earlier, Japan may get the green light for intervention if the USDJPY drops below 100.00 or so. The trouble is that there’s a real danger that speculators “play chicken” with the BOJ to see how far they can take the currency. The effects of any intervention may prove fleeting and there is already a view that the BOJ has run out of ammunition when it comes to effectively loosening monetary policy further. The stakes for Japan’s policymakers are incredibly high given the parlous state of their debt-ridden, low growth and deflation-prone economy.

*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

Category: Weekly Bulletin


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