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Weekly market wrap

By David Morrison  |  27/04/2018 15:13

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This article looks at market moves over the past week with reference to earnings, stock indices, FX and crude oil

European and US stock indices recovered sharply towards the end of the week. This followed on from a dramatic sell-off on Tuesday which extended on into Wednesday morning. Investors were spooked by a rally in US bond yields and this overshadowed a clutch of better-than-expected first quarter earnings reports, including Amazon, Facebook, Microsoft and AMD.

The yield on the benchmark 10-year Treasury note broke above the significant 3.0% level. It traded up over 3.03% before pulling back on Thursday. The rally in bond yields (meaning a sell-off in bond prices) came as investors once again fretted about the outlook for inflation.

The pick-up in oil prices has been one of the drivers behind this week’s sharp rally in bond yields. On top of this, just over a week ago President Trump tweeted that OPEC was pushing oil prices to “artificially” high levels. Of course, much of the recent increase has come on the back of concerns that Trump will reimpose sanctions on Iran and on US tariffs on Russia. But it looks as if Trump is looking to put pressure on Saudi Arabia and other Gulf producers to wind back the current production cut agreement. This brings an extra element to the next OPEC meeting on 22nd June.

Some analysts have pointed out that locking up your money for 10 years in a US T-note for 3% interest per annum is still not particularly attractive. Particularly when inflation as measured by Core CPI is running at 2.1% annualised. However, you can get around 2.5% on a 2-year note and that’s quite an attractive proposition. For this reason, some analysts are pointing out that this is the most important bond benchmark, at least when considering what rate could lead investors to shift their exposure from equities into fixed income.

On Monday we get the latest update for the Fed’s preferred inflation measure, Core PCE. This continues to come in significantly below the central bank’s 2% inflation target. But last month it showed signs of picking up again, rising to 1.6% annualised after stalling out at +1.5% for the three preceding months. Another increase here will only add to inflation worries, particularly there are concerns that US economic growth (like that in the Euro zone) is rolling over. On Friday first quarter US GDP rose 2.3% annualised. This was better than expected, but still below the previous quarter’s +2.9%. A combination of higher inflation and lower growth is termed ‘stagflation’ – a situation in which is generally bad news for both bonds and equities.

Apple releases its earnings update after the market close this Tuesday. 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.

FOREX

The dollar shot higher last week in a move which saw the Dollar Index surge above resistance around 90.00 and push on to retest its 200-day simple moving average (SMA) at 91.40. The EURUSD slumped below support around 1.2200 and closed in on its own 200-day SMA around 1.2050.  The greenback has held in a relatively tight range since early February and the dollar’s pick-up has led some traders to speculate that downtrend that built throughout 2017 may now have come to an end. Others express caution, and suggest sitting back in case last week’s move proves to be a false breakout.

In fact, the euro briefly pushed back above 1.2200 on Thursday afternoon during ECB President Mario Draghi’s post-monetary policy meeting press conference. Mr Draghi sounded bullish on the outlook for the euro zone, shrugging off a recent run of weaker-than-expected economic data. But neither he nor the ECB referred to the future of the bank’s Asset Purchase Programme, preferring to delay this until the summer. The €30 billion per month bond purchase programme is scheduled to finish this September with the first ECB rate hike expected around six months later. The euro resumed its sell-off as there’s a feeling that the ECB may prove to be reluctant to ending its stimulus programme in the face of an uncertain economic outlook.

The dollar has got a boost from rising US bond yields. Last week saw the yield on the 10-year Treasury note push above 3.00% to hit its highest level in four years. Investors are increasingly worried about a pick-up in US inflationary pressures thanks to rising oil prices and the persistent dollar weakness from the last six months of 2017.  The concern is that this could lead the Federal Reserve to accelerate the pace of rate hikes with some analysts now anticipating 75 basis-points of tightening through the rest of this year, up from the current 50 basis-point consensus forecast.

Sterling has pulled back from its best levels with the GBPUSD falling more than 4% over the last ten days. Last week cable broke below its 100-day simple moving average and then dropped further following Friday’s release of a disappointing GDP number. First quarter preliminary GDP rose just 0.1%, well below the +0.3% anticipated. The news effectively ends expectations of another rate hike from the Bank at next month’s meeting. Nevertheless, cable remains in the upwardly trending range that has been building since the beginning of last year.

Crude oil

Buyers continue keep a bid under oil, helping the prices of both WTI and Brent to stay within striking distance of their respective 40-month highs, and firmly within the upward-sloping trend channel that has been building since last summer.

Last week brought concerns of supply disruptions due to the ongoing melt-down in the Venezuelan economy and the prospect of the renewal of trade sanctions against Iran. Both countries are members of OPEC. President Trump described a deal with Iran which lifted sanctions in return for Tehran halting its ambitions to develop nuclear weapons as “insane”. He will decide on 12th May on whether to tear it up and restore sanctions, although French President Emmanuel Macron hopes to have persuaded him otherwise. As Iranian oil exports have risen by one million barrels per day (bpd) since sanctions were lifted, the reinstatement of trade restrictions could see much of this removed from the global market – if, that is, China and other Iran-friendly nations didn’t move in to buy this spare production.

Oil briefly dipped midweek after both the American Petroleum Exchange (API) and Energy Information Administration (EIA) recorded a sharp build in US crude inventories. But overall it continues to trade in the uptrend which began last summer, boosted by the OPEC/non-OPEC agreement to cut output by 1.8 million barrels per day (bpd). 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. 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. In addition, it now seems that Russia (the world’s largest producer) is also open to a further extension of production cuts.

Key events next week

Monday -             CNY Manufacturing/Non-Manufacturing PMIs; EUR German Retail Sales, German Preliminary CPI, Euro zone M3 Money Supply, ECOFIN meetings; USD Core PCE Price Index, Personal Spending, Personal Income, Chicago PMI, Pending Home Sales

Tuesday -             AUD RBA Rate Statement; EUR Bank Holidays across Europe; GBP Manufacturing PMI, Net Lending, Mortgage Approvals; CAD GDP; USD ISM Manufacturing PMI, Construction Spending

Wednesday -     CNY Caixin Manufacturing PMI; EUR Euro zone Final Manufacturing PMI, Preliminary Flash GDP; GBP Construction PMI; USD ADP Non-Farm Employment Change, Crude Oil Inventories, FOMC Rate Decision and Statement

Thursday -           AUD Trade Balance, Building Approvals; GBP Services PMI; EUR CPI Flash Estimate; CAD Trade Balance; USD ISM Non-Manufacturing PMI, Factory Orders

Friday -                 AUD RBA Monetary Policy Statement; JPY Bank Holiday; CNY Caixin Services PMI; EUR Euro zone Final Services PMI, Retail Sales; USD Non-Farm Payrolls, Average Hourly Earnings, Unemployment Rate.  

This week’s major first quarter earnings releases include Anadarko, Apple, Bayer, BP, Devon Energy, HSBC, IAG Group, Marathon Oil, McDonald’s, Merck, WPP.  

Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and GKFX accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.
 

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