Weekly market wrap

By David Morrison  |  13/04/2018 15:19

Earnings in focus

The first quarter earnings season got underway last week as results came in from some of the world’s leading banks. JP Morgan was first up, announcing better-than-expected numbers. Revenues rose sharply while the bank posted earnings-per-share of $2.37 against a consensus forecast of $2.28 - well above the $1.65 per share from this time last year. Citigroup and Wells Fargo also beat on both earnings and revenues, if less spectacularly. The stock prices of all three banks rose over 1% in pre-market trade. The financial sector makes up close to 15% of the S&P 500's market capitalisation (only lagging technology in terms of weighting) so this helped to lift US stock index futures ahead of the open.

Early gains evaporate

Investors initially saw the results as a good omen for the rest of the season and a welcome relief from concerns over a possible escalation of hostilities in Syria or another negative turn in the US-China tariff tit-for-tat. However, it didn’t take long for the gloss to come off equities as the bank stocks gave up their early gains and turned lower soon after the open. This hasty reversal of fortune was blamed on concerns that the financial sector may struggle to push earnings further above the lofty expectations in place for the rest of the year.

Trade issues remain

Earlier in the week there were signs of a rapprochement over trade issues after China’s President Xi Jinping promised to reduce tariffs on the imports of foreign autos. Crucially, President Xi also said China would expand the protection of intellectual property which is perhaps Trump’s key aim in threatening tariffs on $150 billion of Chinese exports to the US. The news took some pressure off markets, although everything has been talk so far and there’s still a concern that the issues are far from being resolved. Last week China’s Commerce Ministry spokesman Gao Feng said China will "unquestionably" retaliate should the US escalate trade tensions further.

Syria escalation?

Equity markets took another brief tumble after Trump threatened a military response against President Assad’s forces following a gas attack in Syria last weekend. However, Mr Trump rowed back from an earlier tweet saying Russia should “get ready” for US missiles saying that such a response wasn’t imminent. Nevertheless, there has been a sharp pick-up in US military activity in the region and an escalation can’t be ruled out.

1^st quarter earnings worries

Going into Friday’s US open global stock indices were broadly firmer with the majors all on course to post solid gains for the week. There are hopes that Trump’s corporate tax cuts will show up in US earnings and lead to further stock buy-backs and dividends, providing another boost to equities. However, some analysts continue to warn that the year-on-year comparisons could prove difficult given the strong first quarter recorded in 2017.
 
 FOREX

Wednesday saw the release of minutes from the Fed’s last meeting. These were viewed as hawkish with Fed members expecting the economy to strengthen and inflation to rise "in coming months." It now appears that the Federal Reserve is actively discussing how to cool off the economy.

Then on Thursday we had minutes from the ECB's meeting in early March, when the bank dropped a long-held pledge to accelerate its bond buying program if the Euro zone economy were to deteriorate. The euro sold off sharply following the release as members of the Governing Council noted their “concern that the risk of trade conflicts, which could be expected to have an adverse impact on activity for all countries involved, had increased…It was also cautioned that negative confidence effects could arise.”
But the net effect overall was minimal as both the EURUSD and Dollar Index remain stuck in trading ranges. The Dollar Index continues to be capped by resistance around 90.00 with the first line of support coming in at 89.00. Meanwhile last week saw the EURUSD bound by 1.2400 to the upside and with support around 1.2250.

Elsewhere, the USDJPY is closing back in on resistance around 108.00 as risk appetite retuned. This saw investors sell (borrow) the low-yielding yen to finance positions in higher-yielding (and risker) assets. The GBPUSD is now retesting the upper end of a positive trendline that has been building since the beginning of last year.
 
Precious metals

If we look at a weekly chart and take it back to gold’s nominal peak around $1,920 in September 2011, it looks as if the price went on to bottom just above $1,000 in December 2015. Since then we’ve seen a succession of significantly higher lows which have helped to form an upwardly-sloping trendline as potential support. But the gold price has been repeatedly capped by a band of resistance around $1,360. We really need to see the gold price break and hold above here for a few weeks to get comfortable with the idea of another leg higher. This could happen, but it will probably need a weaker dollar to do it, and as things stand the Dollar Index remains range-bound.

Silver is also range-bound, with prices roughly stuck in a band between $16.30 and $16.80. As noted last week, in contrast to gold, silver is trading closer to its multi-year lows than its multi-year highs. This means that the gold/silver ratio (that is the price of an ounce of gold divided by the price of an ounce of silver) remains at a 2-year high above 80. Historically we should expect this ratio to narrow suggesting that silver is ready to strengthen relative to gold. However, there’s no reason why the gap can’t decrease through a fall in gold, or indeed that both rally but with silver moving further in percentage terms. As with gold, much will depend on where the dollar heads over the medium term and that is likely to be a function of how inflation expectations pan out.

Crude oil

Oil prices surged higher last week in a move which took both WTI and Brent back up to levels last seen at the end of 2014. WTI bounced sharply off support around $62 before breaking above resistance just north of $66 per barrel. Brent surged through resistance around $70 and came close to hitting $73. It now looks as if $70 is an achievable target for WTI, particularly if the situation in Syria escalates to the point when the US and its allies increase their involvement militarily. But given the rapid pace of last week’s rally we may have to see prices pull back and consolidate before traders have the confidence to push oil higher.

Both WTI and Brent continue to trade within an upward-sloping trending range which first took hold last summer. Most of the gains since then have been attributable to the success of the OPEC/non-OPEC output cut of 1.8 million barrels per day (bpd). There are also expectations that global demand will grow strongly as we look forward to a period of synchronised global growth, although this forecast will be tested should there be an escalation in the US-China tariff stand-off.

Nevertheless, the latest oil report from OPEC forecasts that global demand will continue to grow and support prices. This is despite some contradictory economic data releases which include a weak US non-farm payroll number, a growing expectation that first quarter US GDP will disappoint and a string of weak data releases from China and the Euro zone.

On the supply side, OPEC production (primarily Saudi Arabia) is declining although US shale is filling the gap. OPEC Secretary General Barkindo expects the current OPEC/non-OPEC output cut deal to be extended beyond the end of this year. This is despite talk that Russia is keen to end the agreement once global inventories fall back towards their 5-year average - something which could happen later this year.

But recent data suggest that supplies remain ample. Last week the US Energy Information Administration reported that US inventories had risen by 3.3 million barrels, well above the 600,000-barrel drawdown expected. Meanwhile, US production hit a fresh record of 10.53 million bpd, once again outstripping Saudi Arabia’s output and closing in on Russia at 11 million bpd.
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Key events next week

Monday -             US Retail Sales, Business Inventories, Treasury Currency Report

Tuesday -             AUD Monetary Policy Meeting minutes; CNY GDP, Fixed Asset Investment, Industrial Production, Retail Sales; GBP Claimant Count, Unemployment Rate, Average Earnings; EUR German, Euro zone ZEW Economic Sentiment survey; USD Building Permits, Housing Starts, Capacity Utilisation, Industrial Production

Wednesday -     GBP CPI, RPI; EUR Final CPI, Eurogroup Meetings; CAD BOC Rate Statement, Press Conference; USD Crude Oil Inventories

Thursday -           AUD Employment Change, Unemployment Rate; GBP Retail Sales; EUR ECOFIN Meetings; USD Philly Fed Manufacturing Index, Weekly Jobless Claims

Friday -                 CAD CPI, Retail Sales; IMF Meetings.

We have first quarter earnings from American Express, Bank of America, General Electric, Goldman Sachs, IBM, Johnson & Johnson, Morgan Stanley, Netflix and Schlumberger amongst others.   

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