Incisive market commentary from David Morrison

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Using the RSI in FX - Trading Guide
31 Jul 2017
HSBC share buy-back helps lift indices - AM Briefing
31 Jul 2017
Amazon triggers tech tumble - AM Briefing
28 Jul 2017
Fed reinforces dovish credentials - Video Update
27 Jul 2017
Facebook results boost NASDAQ - AM Briefing
27 Jul 2017
Crude breaks above resistance - PM Bulletin
26 Jul 2017
Equities rally on positive earnings - AM Briefing
26 Jul 2017
Look-ahead to tomorrow’s rate decision from the Fed
25 Jul 2017
Alphabet/Google falls 3% in after-hours trade
25 Jul 2017
Equities start the week on back-foot - AM Briefing
24 Jul 2017
Euro surges on “hawkish” comments from Draghi - AM Briefing
21 Jul 2017
Equities firmer ahead of ECB meeting - AM Briefing
20 Jul 2017
Europe firmer after late US rally - AM Briefing
19 Jul 2017
US Fed turns dovish - PM Bulletin
18 Jul 2017
Dollar slumps on US healthcare gridlock - AM Briefing
18 Jul 2017
Wall Street leads equity rally - AM Briefing
17 Jul 2017
US bank earnings in focus - AM Briefing
14 Jul 2017
Yellen flip-flops to reassure investors - AM Briefing
13 Jul 2017
Oil rallies, but volatility high - Video Update
12 Jul 2017
Yellen to testify in Washington - AM Briefing
12 Jul 2017
A look-ahead to Janet Yellen’s testimony - PM Bulletin
11 Jul 2017
Second quarter earnings in focus - AM Briefing
11 Jul 2017
Jobs data boost sentiment ahead of earnings - AM Briefing
10 Jul 2017
Investors nervous; Non-Farm Payrolls in focus - AM Briefing
07 Jul 2017
Non-Farm Payroll look-ahead - Video Update
06 Jul 2017
Investors shrug off FOMC minutes - AM Briefing
06 Jul 2017
Investors shrug off FOMC minutes - AM Briefing
06 Jul 2017
Look-ahead to FOMC minutes - Video Update
05 Jul 2017
Markets quiet and waiting for fresh guidance from US - AM Briefing
05 Jul 2017
Crude continues to push higher - PM Bulletin
04 Jul 2017
Dow closes at fresh record high - AM Briefing
04 Jul 2017
Positive start to second half of 2017 - AM Briefing
03 Jul 2017
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Early moves

US index futures build on gains

Europe cautious

There’s a mixed tone across European equities this morning, despite a positive close on Wall Street last night. The Dow posted a fresh record all-time high while the NASDAQ and S&P500 also made solid gains. However, traders in Europe appear to be exercising some caution this morning, despite all three US index futures building on last night’s gains in early trade.

Traders are still mulling over Fed Chair Janet Yellen’s testimony before the House Financial Services Committee. She certainly threw a bucket of water over the hawkish flames which have been fanned by the Fed since early June. This could simply be an attempt to reassure investors that the US central bank will continue to back-stop them with pauses in their process of monetary tightening. This would be a response to concerns in some quarters that the Fed was no longer data-dependent; that it was prepared to blindly raise rates even in the face of falling inflation or other signs that the US economy was faltering. In fact, some analysts were convinced that the Fed was happy to let some air out of the market following comments from Yellen and others about equities being expensive by “some measures.” Well Dr Yellen has certainly smacked the lid down on that train of thought.

Stock Index Update

Dow posts record close after Yellen testimony

Fed Chair tones down hawkish rhetoric

US and European stock indices surged higher following the release of Janet Yellen’s testimony before the House Financial Services Committee yesterday. Investors piled back into equities after the Chair of the Federal Reserve indicated that the US central bank may not have to raise rates much further to reach a neutral level. She also said that the Fed was keeping a close eye on inflation. This is important as key inflation measures are still some way off the Fed’s 2% target and have been trending lower since February. This means inflation will continue to be an important factor in future rate decisions. Dr Yellen appears to be telling investors that the central bank remains data-dependent and will not blindly tighten monetary policy if there’s any deterioration in inflation or the employment situation.

Dr Yellen also said that the central bank will likely begin unwinding its $4.5 trillion bond portfolio later this year. Earlier this week JP Morgan CEO Jamie Dimon warned that the Fed was being complacent concerning the winding down of its balance sheet. He said that in the same way that quantitative easing was unprecedented, so was its unwinding. Consequently the risks were unquantifiable and the process could be more disruptive than many commentators (and central bankers) are expecting. He said: “We act like we know exactly how it’s going to happen and we don’t.”

Commodities Update

Crude slides despite inventory draw

Yellen’s testimony boosts gold and silver

The Energy Information Administration (EIA) released its latest US inventory data yesterday afternoon. This showed large draws for the Cushing hub, crude and gasoline - effectively confirming last night’s report from the American Petroleum Institute (API). Crude stockpiles fell 7.5 million barrels, recording its biggest draw since September last year while Cushing experienced its biggest reduction in inventories since February 2014. But just as last week, crude oil sold off on the news, despite having rallied on the API release. It’s as if traders wanted the data out of the way before they were able to react to other oil-related news.

The EIA modestly cut its US production outlook for next year to 9.9 million barrels per day (bpd) from 10 million. But it’s worth noting that this will still be a record and the EIA also downgraded its average price forecasts for crude over the next few years. Also yesterday OPEC said oil production rose again in June, driven by increases in Libya and Nigeria, Iraq and Angola.  Plus Saudi Arabia reported it pumped more than it agreed to last year. And Iraq and Angola both increased output. L & N exempted due to internal conflicts. The cartel also projects non-OPEC production growth will grow by 1.14 million barrels a day, driven by more pumping in the United States, Brazil, Canada and Russia. OPEC expects world oil demand growth to slow down slightly next year. It forecast global consumption will grow by 1.26 million barrels a day to average 97.6 million barrels a day in 2018.

Gold and silver were both beneficiaries from Federal Reserve Chair Janet Yellen’s prepared testimony to the House Financial Services Committee yesterday. The two metals were modestly higher before the statement was released, building on gains made earlier in the week. But both surged as her testimony hit the newswires. What took just about everyone by surprise was how she talked down the scale and timing of future monetary tightening after a deluge of hawkish commentary ever since the Fed’s June meeting. Dr Yellen said that the key fed funds interest rate may "not have to rise all that much further to get to a neutral policy stance."

Gold and silver continue to look healthier from a technical perspective after brave traders piled in to take advantage of the recent price melt-down. However, it may be a bit early to conclude that the worst is over. The markets are taking Dr Yellen at her word for now. But history suggests that may be a dangerous thing to do. It’s always possible that the Fed tightens on regardless, even as inflation continues to fall. That would not be a good environment for gold or silver.

Forex Update

Dollar slumps on dovish Yellen

Bank of Canada raises rates

The dollar was back in focus yesterday following the release of Fed Chair Janet Yellen’s prepared testimony to the House Financial Services Committee. The overall dovish tone took investors by surprise and this saw the greenback fall sharply against the Japanese yen, Canadian dollar and British pound. Perhaps the key phrase from Dr Yellen which led to the dollar sell-off related to just how many more rate hikes we should now expect: “Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance.” This was something of a surprise. The fed funds rate currently trades in a band below 1.25%, and the general consensus was that the Federal Reserve would keep tightening until rates got up to 3% or thereabouts. That implied another seven rate hikes of 25 basis points each. Assuming the Fed hiked each and every quarter (which they wouldn’t anyway) they’d achieve 3% in March 2019. And all this is regardless of any balance sheet reduction. So, the question now is what does the Fed consider a neutral rate for fed funds? Meanwhile, the Canadian dollar was also helped along after the Bank of Canada raised its key overnight rate to 0.75% from 0.50%, as expected.

Upcoming events

Today’s significant events and economic data releases include French and German CPI and the Bank of England’s Credit conditions Survey. From the US we have PPI, Weekly Jobless Claims and a second day of testimony from Janet Yellen in Washington. We also have speeches from FOMC-voting members Charles Evans and Lael Brainard.


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Posted by David Morrison

Category: AM Bulletin

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