Weekly market wrap

By David Morrison  |  20/04/2018 15:06

This article looks at market moves over the past week with reference to earnings, stock indices, FX, oil and precious metals
 
Earnings in focus

Going into Friday’s US open there was a weaker tone emerging across US and European stock indices. This raised the possibility that the major indices were on course to give up gains made earlier in the week. This came despite a fairly solid start to the first quarter earnings season with well over 70% of S&P 500 corporates beating consensus estimates on both revenues and earnings.

Apple’s share price has come under selling pressure. This followed news that Taiwan Semiconductor, the world’s largest semiconductor producer, offered up disappointing forward guidance, blaming reduced demand from a "very high-end smartphone". This is widely thought to be Apple’s iPhone.

Apple doesn’t release its earnings update until after the market close on Tuesday 1^st May. The company is expected to produce another solid quarter in terms of iPhone shipments, sales and earnings. However, there are concerns about the outlook going forward with some analysts warning that estimates of iPhone shipments may be revised down for the quarter ending in June.

Meanwhile, US banking stocks edged higher after selling off in the prior week. JP Morgan, Citibank, Wells Fargo, JP Morgan, Morgan Stanley and Goldman Sachs all posted solid results. But investors initially dumped stocks on fears that the financial sector may struggle to push earnings further above the lofty expectations in place for the rest of the year.

Earnings continue to get a boost on hopes that Trump’s corporate tax cuts will lead to further stock buy-backs and dividends, providing another boost to equities. Yet there’s still a worry that the expectations for year-on-year comparisons could prove difficult to beat given the strong first quarter recorded in 2017.

US/China trade issues unresolved

On Monday the White House banned American companies from selling components to Chinese telecom-equipment manufacturing giant Zhongxing Telecommunications Equipment (ZTE) for seven years. Back in March 2017 China’s second-largest telecoms equipment maker (and fourth largest seller of smartphones in the US) pleaded guilty to the illegal shipping of US technologies to Iran and other banned countries. The move looks likely to spark a response from China, although it also exposes China’s reliance on imported technology. Chinese officials are now looking to speed up the development of the country’s chip industry.
 
FOREX

The dollar spent yet another week trading within a tight range against the euro, and hence the Dollar Index was rangebound as well. The EURUSD appears to be forming a triangle pattern with a succession of lower highs and higher lows as prices compress. Typically, a triangle is considered a continuation pattern which, following last year’s dollar sell-off, would suggest that the EURUSD could break to the upside should the pattern complete. However, this doesn’t always follow and there are plenty of reasons why the dollar may finally reverse direction sending the EURUSD lower. Perhaps the main reason is the growing interest rate differential between the US and the Euro zone.  On top of this the Fed is steadily removing monetary stimulus as it winds down its balance sheet and, despite contradictory comments from its members, the European Central Bank (ECB) has shown little appetite for tightening monetary policy. We will find out on Thursday if there’s any clarification on the ECB’s position when the central bank holds its latest monetary policy meeting.

But there are also reasons why the dollar could weaken from here. After all, it’s apparent that the Trump administration favours a weaker dollar to boost exports and help “Make America Great Again”. Unfunded tax cuts and Congress’s spending proposals are increasing the deficit, adding to the US national debt and weighing on the greenback. There’s also the issue of the long-term erosion in the dollar’s position as the world’s reserve currency. The US now contributes less than 25% to global economic activity while the dollar makes up over 60% of global FX reserves. This difference is set to narrow over time and we can see China’s recent efforts to increase the use of the yuan in everyday trade.

Precious metals

Silver suddenly spiked higher last week, surging through resistance and breaking above $17 to hit its highest level since the beginning of February. The move in silver has been a long time coming as prices have been roughly rangebound between $16.30 and $16.80 for the past two months. Not only that, but this price consolidation has taken place with silver trading nearer its multi-year lows than multi-year highs while the gold/silver ratio (that is the price of an ounce of gold divided by the price of an ounce of silver) hovered at a 2-year high above 80. Last week this ratio dropped back to the high 70s which is still toppy by historical standards. There’s also been chatter about the heavy short-side positioning by large speculators. There can be little doubt that this will have fallen somewhat due to short-covering on last week’s sharp rally. But some traders are suggesting that if silver were to hold on above $17 then another pick-up in prices could lead to an even gigger short-covering rush.

Meanwhile, gold remains rangebound and has repeatedly failed to break and hold above $1,360. There’s some mild support around $1,320 and something more substantial at $1,300. The problem for gold is that the dollar is also stuck in a narrow range. The probability is that we’ll see a breakout for the greenback in the next couple of weeks following the past three months of consolidation. The trouble is that it’s difficult to know if this will lead to a continuation of the dollar sell-off from last year (which would be positive for gold) or the beginnings of a reversal and a push higher which should lead to a corresponding sell-off in the precious metal.
 
Crude oil

Oil pushed higher again last week in a strong move which saw both WTI and Brent hit fresh 40-month highs. Prices fell back on Friday afternoon after a tweet from President Trump in which he blamed OPEC for artificially high prices. Nevertheless, recent gains have come on fears of rising tensions across the Middle East following the US/UK/French response to allegations of the Syrian government’s use of chemical weapons. The US is also understood to be set to renew sanctions against Iran. But a bigger-than-expected drawdown in US inventories also helped to boost prices, as did numbers which show the strongest year-on-year global demand growth in the first quarter of this year since 2010.
Both contracts continue to trade within an upward-sloping trending range which first began to establish itself last summer. The rally has come on the back of the OPEC/non-OPEC agreement to cut output by 1.8 million barrels per day (bpd). The deal came into force at the beginning of 2017 and there was initial scepticism that all parties would play fair by sticking to production cuts. However, compliance has been better than expected and this has helped to reduce global stockpiles back towards the 5-year average. This is despite a ramp-up in output from US shale producers which has taken US production up to a fresh record above 10.5 million barrels per day.

The OPEC/non-OPEC output cuts have been extended in duration and are now set to run until the end of this year. There has been talk that Russia is agitating to end the agreement early. However, during an interview with CNBC’s Steve Sedgewick on Friday, Russia’s energy minister suggested that the country would continue to support OPEC in a move to extend the output cuts further. Saudi Arabia has made it clear that it would like to see WTI settle in above $80 – a price which would boost the chances of a solid IPO for state oil giant Aramco.
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 Key events next week

Monday -             JPY Flash Manufacturing; EUR French, German, Euro zone Flash Manufacturing and Services PMIs, German Bundesbank monthly report; USD Flash Manufacturing and Services PMIs, Existing Home Sales

Tuesday -             AUD CPI; EUR German Ifo Business Climate survey; GBP CBI Industrial Order Expectations, Public Sector Net Borrowing; USD Consumer Confidence, New Home Sales

Wednesday -     CNY CB Leading Index; USD Crude Oil Inventories

Thursday -           EUR Spanish Unemployment, ECB Rate Decision and Press Conference; USD Durable Goods, Weekly Jobless Claims

Friday -                 JPY BOJ Rate Decision and Press Conference (to be confirmed); EUR Spanish Flash CPI, Flash GDP, Eurogroup Meetings; GBP Preliminary GDP; USD Advance GDP, Consumer Sentiment, Inflation Expectations.

The major first quarter earnings releases include Alphabet (Google), Amazon, AT&T, Barclays, Caterpillar, Coca-Cola, Colgate-Palmolive, Deutsche Bank, DR Horton, eBay, Exxon Mobil, Facebook, Ford, GlaxoSmithKline, Halliburton, Intel, Interpublic, Lloyds Banking Group, Microsoft, PayPal, PepsiCo, Qualcomm, Royal Bank of Scotland, Royal Dutch Shell, Starbucks, Visa, Volkswagen.

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