Indices Update
European equities and US stock index futures are sharply lower this morning following the Bank of Japan’s (BOJ) decision overnight to hold off from further stimulus. This took many investors by surprise as recent earthquakes and a bout of yen strength had been considered the perfect cover for yet another round of intervention from the BOJ. But there were concerns that additional monetary easing at this time could have proved ineffective, leading to a crisis of confidence in the BOJ, and by extension, other central banks. Nevertheless, the Nikkei fell sharply overnight closing 3.6% lower at 16,666. Meanwhile, the yen has rallied sharply and at the time of writing the USD/JPY is close to 108.00. BOJ Governor Haruhiko Kuroda said the negative interest rate policy adopted in January needed time to work. He also said that he didn’t see a limit to monetary policy.
Yesterday evening, the US Federal Reserve kept rates on hold, as expected. The accompanying FOMC statement was viewed as a touch more hawkish than the one from March, and it appeared to keep the door open for a hike in June. It was of particular note that the FOMC removed its reference to global events posing risks to their outlook.
In other news, after the US close Facebook (NASDAQ:FB) delivered a strong set of earnings. The stock is up around 9% in after-hours trade.
Investors in the major European and US stock indices were in a skittish mood yesterday morning. Initially there was a softer tone following earnings disappointment from Apple (NASDAQ:AAPL) and weak forward guidance from Twitter (NYSE:TWTR). However, the major indices (excluding the tech-heavy NASDAQ) climbed back into positive territory at the European open thanks mainly to continued strength in crude oil.
But there was an apparent divergence between US and European equities. The Europeans managed to eke out small gains while the major US indices struggled to stay in the black – no doubt weighed down by the NASDAQ which spent the whole pre-market session in negative territory. Investors in tech stocks have lost some of their mojo due to the poor results from market darlings Apple and Twitter.
The FTSE 100 index closed at 6,319.9 up 35.4 points on the day, or 0.6%
The German DAX rose 40.2 points or 0.4% to finish at 10,299.8
The US 30 closed up 51.2 points to finish at 18,041.6 The S&P 500 ended 0.2% higher at 2,095.2 while the Nasdaq 100 ended down 0.8% at 4,416.6.
Equities Update
Barclays’ (BARC) first quarter pre-tax profit slumped 25% year-on-year to £793 million while revenues were down 13% year-on-year to £4.6 billion. Pre-tax profit came in around £50 million below expectations while revenues exceeded consensus estimates of £4.48 billion. The stock shot up close to 5% on the open but pulled back over the course of the morning. Barclays (LON:BARC) closed at 174.8 pence up 0.5%
Commodities Update
Crude surged higher in early trade yesterday. Both WTI and Brent hit their best levels since November last year. However, they pulled back sharply following the latest US crude inventory data from the Energy Information Administration (EIA). This showed a build of 2 million barrels last week – slightly above the 1.4 million expected. On Tuesday oil had rallied sharply following the release of inventory data from the American Petroleum Institute (API). This recorded a draw of nearly 1.1 million barrels in US inventories last week. Analysts had expected a build of 2.4 million barrels.
Brent and WTI are both up close to 70% from their January/February lows. The trigger for the latest leg of this rally was talk of an output freeze by OPEC and non-OPEC producers. All hopes for a deal collapsed ten days ago in Doha amid general recriminations. Nevertheless, crude has continued to push higher as analysts predict that supply and demand will come into balance earlier than previously calculated.
But it may become more difficult for crude to push on much higher from here. As $50 per barrel becomes a possibility, we should see mothballed US shale production come back on line. On top of that producers will sell forward contracts to lock in prices. In addition, chart-wise there’s resistance for WTI around $45.50 – the 76.4% Fibonacci Retracement of the October 2015 – February 2016 sell-off.
Gold and silver have pushed higher overnight following the BOJ’s decision to hold off from further monetary stimulus. The news has led to a sharp rally in the Japanese yen and a significant pull-back in the US dollar. The dollar Index has cracked below support around the 94.00 area and this has supported the two precious metals.
Gold and silver rallied sharply for the first half of yesterday’s trading session. However, they both pulled back soon after the US exchanges opened for business. Their fortunes were closely tied to those of the dollar, although in an inverse fashion. The dollar spent most of the morning on the back-foot but rallied sharply not long before the European close. There was no obvious catalyst for the move. Nevertheless, gold managed to hold above $1,240 and silver kept its head above $17 per ounce.
Forex Update
The US dollar swung about wildly in the immediate aftermath of yesterday’s Federal Reserve meeting. The trading algorithms had trouble interpreting if the accompanying FOMC statement was dovish or hawkish. Although by Wall Street’s close the consensus was that it ever so slightly increased the likelihood of another rate hike in June. Nevertheless, the Fed had given itself plenty of wriggle-room, even if it has toned down its concerns for the global economy.
But the main event was the BOJ meeting as discussed earlier. This was unequivocally yen-positive, and this morning the USD/JPY hit its lowest level since 18th April and came within a few ticks of breaking back below 108.00
The Australian dollar fell sharply yesterday morning following the country’s latest CPI release. Headline inflation fell 0.2% over the last quarter – its lowest reading since early 2009 – well below the 0.3% increase expected. The news has raised the prospect of a rate cut from the Reserve Bank of Australia (RBA) when it meets next Tuesday. The RBA has managed to keep rates unchanged at 2% since May last year. The pull-back in inflation is a concern when one considers how closely Australia’s economy is tied to China’s. The sell-off in the AUD/USD has brought the pair within a few ticks of significant support around 0.7600. A break below here would open up the possibility of a move to 0.7400 or below. However, in the short-term, much will depend on tonight’s US Federal Reserve meeting. If the accompanying FOMC statement is perceived as hawkish, raising the prospect of a further rate hike in June, then the Aussie dollar could come under further pressure.
The GBP/USD failed to break above resistance around the 1.4640 area. This level marks the convergence of a couple of significant Fibonacci Retracements and also acted as support back in March and April last year. UK Preliminary GDP came in at +0.4% for the first quarter, as expected. There was also a modest upward revision for the fourth quarter. However, the market reaction was muted, indicating that Brexit fears along with unease ahead of central bank meetings from the US and Japan were of greater concern.
Upcoming events
Today’s significant economic events include German and Spanish CPI and Unemployment, US Advance GDP and Weekly Jobless Claims.
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