index

US Pre-Open Call

Thu, 27 Sep 2012 09:54:26 +0100

DJIA up 50 at 13,464

S&P up 5 at 1,438

US stock index futures are firmer this morning, and have made back all of yesterday's losses. Yesterday, investors had been rattled by the violence that had broken out during demonstrations in Spain and Greece. The growing civil unrest has raised fears that European leaders are losing the confidence of the people and will struggle to follow through with planned, let alone any future, austerity measures.

Concerns are growing that US equities have now seen their best levels for the year. The post-QE3 euphoria appears to have faded quickly, with the Fed's additional monthly bond purchases being quickly priced in and out again. If so, then there are reasons to worry, as it means that the half-life for the positive effects of QE3 has been measured in days, rather than months. But at least we know that the Fed will continue to pump in an additional $40 billion of liquidity each and every month until it decides that the US employment situation has improved significantly. The situation in the euro zone is more opaque. ECB President Mario Draghi has promised to "do whatever it takes" to preserve the euro. Earlier this month the European Central Bank stated that it stands ready to buy unlimited quantities of troubled countries' sovereign debt in order to control borrowing costs. But any country requiring such aid will have to make an official request for a bailout, and this will mean an outside audit and conditionality attached to any ECB bond purchases. Spanish PM Mariano Rajoy is reluctant to submit to the EU/IMF/ECB troika in return for help. He is hoping that the announcement later today of a new Spanish budget and programme of economic reforms will pre-empt the imposition of further austerity measures as a condition of a bailout.

So traders will be keeping a close eye on events in Europe. On top of this, today sees the release of a string of US data including weekly jobless claims, durable goods, final GDP and pending home sales.

US Pre-Open Call

Wed, 26 Sep 2012 08:37:37 +0100

DJIA down 2 at 13,456

S&P down 1 at 1,441

US stock index futures were steadier first thing this morning following yesterday's sharp sell-off. However, they have struggled to hold on to early gains and now look like opening lower later today. Last night, the major indices all closed near their day's lows with Apple ending 2.5% lower (iPhone5 supply issues), while construction and equipment maker Caterpillar plunged more than 4% in the session (profits warning). Some blamed profit-taking ahead of the quarter-end on Friday, together with nervousness ahead of the third quarter earnings season. However, the fact that the NYSE was rash enough to ask ex-Prime Minister Gordon Brown to ring the opening bell could just as easily account for the pull-back.

European equities are sharply lower this morning. Some of the losses are down to the markets playing catch-up with last night's sell-off, but there are also growing concerns that the situation across the euro zone is set to take a turn for the worse. Three weeks ago Mario Draghi announced that the ECB stood ready to purchase the sovereign debt of troubled euro zone countries in unlimited quantities - subject to "conditions". Since then, investors have been second-guessing when Spain would finally bite the bullet, officially request a bailout from the EFSF/ESM and throw themselves on the troika's pitchforks. So far, Prime Minister Rajoy has held back, insisting that Spain is on track to sort out its own problems, and probably won't even need all of the 100 billion euros which it has managed to wangle out of the EU to shore up its crippled banking sector. But yesterday's anti-austerity protests in Madrid, together with today's 24-hour strike in Greece, are both reminders that rampant unemployment and a general collapse in living standards make people desperate and angry. If Spain does ask for further help, then additional conditionality (imposed by bureaucrats from outside the country) is likely to increase the discomfort already being felt. The Spanish IBEX and Italian MIB are both down over 2% so far today.

At current levels, the S&P 500 is now just a couple of points higher than it was before Fed Chairman Ben Bernanke announced QE3. This should be a particular concern for investors. Although stimulus expectations were already priced into equities to some extent, the Fed's decision to leave the programme open-ended should have helped to keep equities elevated for some time. However, there is a growing feeling that there are limits to the effectiveness of intervention from central banks, and now it is the policymakers' turn to step up to the plate and take unpalatable action. This will prove difficult - particularly in the US with the Presidential Election just six weeks away.

US Pre-Open Call

Mon, 24 Sep 2012 08:20:57 +0100

DJIA down 20 at 13,559

S&P down 3 at 1,457

US stock index futures are a touch lower in early trade and point to a weaker opening this afternoon. We are now into the last week of the third quarter and US equities continue to trade near multi-year highs. The question now is if investors feel brave enough to continue to buy stocks at such elevated levels? One driver for prices will be end of quarter window-dressing by fund managers. But it is difficult to predict whether this will be positive or negative overall. Some mangers will be buying as they find themselves underweight in equities. But this could be offset by others looking to book profits after such a strong quarter.

We are also approaching the third-quarter earnings season, and November brings the US Presidential Election. The US Federal Reserve and European Central Bank's liquidity measures should continue to underpin markets, but attention is now increasingly focused on politicians rather than central bankers. There are raised concerns about the ability of US policymakers to deal with the spending cuts and tax rises that are due to kick in at the beginning of next year. Meanwhile, Spain continues to dither over requesting a bailout and there is renewed talk of leveraging the European Stability Mechanism.

US Pre-Open Call

Thu, 13 Sep 2012 08:39:01 +0100

DJIA unch at 13,333

S&P unch at 1,436

US stock index futures are currently unchanged this morning as investors prepare themselves for the FOMC statement later today. Last night US equities ended a touch higher thanks to a late rally in Apple which pulled up the rest of the market. The stock had weakened earlier in the day following the "Apple Event" which showcased the new iPhone 5, which was felt to be underwhelming. Overnight, Asian Pacific indices were little-changed. But European equities are weaker this morning, with the Italian MIB and Spanish IBEX down 1% and 0.7% respectively. This is despite some good news far as Europe is concerned. Yesterday saw the German court rule that the European Stability Mechanism and fiscal pact were constitutional under German law. This morning, the centre pro-European Liberal party is on course to end up as the biggest single party following the Dutch general election. This means that Mark Rutte will stay on as prime minister. It is also a surprise as the fringe euro-sceptic parties were widely rejected by voters. Overall, this is good news for the euro zone as the Netherlands now looks likely to be supportive of measures to support troubled member countries.

But back to the main event which is today's FOMC decision. There can be little doubt that investors have priced in significant action from the Federal Reserve. The expectation is for a further round of Large Scale Asset Purchases similar in scale to 2010's $600 billion QE2 programme. But there is growing speculation that any new programme will be open-ended which will give the Fed the flexibility to act when it feels necessary. It is also felt that the bulk of any buying will be aimed at Mortgage Backed Securities as this is considered more palatable to the public. With so much already priced in to markets, there is plenty of scope for disappointment as the Fed may decide to wait until Operation Twist expires at year-end. After all, how would the Fed justify taking such drastic action when US equities are at multi-year highs, bond yields near record lows, the euro zone situation apparently more stable than it has been all year and the Chinese authorities announcing large infrastructure spending plans? So the language accompanying another round of quantitative easing will be all-important. But however Ben Bernanke dresses up further stimulus (assuming the FOMC deems it necessary), he will face a hail of criticism from certain quarters. After all, if quantitative easing worked, why is it being considered now? With two months to go before the US Presidential Election, the Federal Reserve risks becoming a punch-bag in any economic debate between Republicans and Democrats.

US Pre-Open Call

Wed, 12 Sep 2012 08:45:59 +0100

DJIA up 40 at 13,363

S&P up 4 at 1,438

US stock index futures were little-changed in early trade this morning. Nevertheless, there was a moderately positive tone following on from yesterday's session. Trading was initially subdued as investors waited for the German court ruling on the constitutionality of the ESM. The dominant view was that the Constitutional Court would rule in favour of the new European bailout fund being ratified, but that it would apply conditionality. In fact, that is exactly what happened. The main condition is that Germany must set a cap for liability to the ESM of 190 billion euros.

The Dutch General Election takes place today. According to the polls, the Liberal and Labour parties are both tied in the polls. But as there are around 10 parties vying for 150 seats under proportional representation, some type of coalition is necessary to form a government. The big question is how quickly this can be achieved.

There is an "Apple Event" later today and the expectation is that the tech giant will unveil the iPhone 5. This should create some buzz, so the share price is worth watching - especially as it now contributes around 20% to the Nasdaq 100 index. But tomorrow sees the big event of not just the week, but arguably the whole summer. The US Federal Reserve's FOMC delivers its statement at the end of a two-day meeting. Investors seem convinced that the FOMC will announce another programme of bond purchases, most likely aimed at the mortgage market. Their conviction follows last Friday's dreadful Non-Farm Payroll numbers, and Fed Chairman Ben Bernanke's comments at Jackson Hole when he said that unemployment remained a "grave concern." Accordingly, there is plenty of scope for the FOMC to disappoint. If the committee holds off from announcing Large Scale Asset Purchases tomorrow, then we can expect risk assets such as stocks and precious metals to give back recent gains.

US Pre-Open Call

Tue, 11 Sep 2012 08:33:22 +0100

DJIA up 20 at 13,274

S&P up 2 at 1,431

US stock index futures are a touch firmer this morning after closing lower in yesterday's session. Investors are preparing themselves for a busy week as there are a number of significant events coming up. However, there is little on the calendar today, so in the absence of a surprise, we can expect equities to trade in narrow ranges. Last night, the Nasdaq closed sharply lower as Apple fell 2.6% on the day, after earlier hitting an all-time high of $683. Investors trimmed their exposure to the tech giant ahead of tomorrow's big event when Apple is expected to unveil the iPhone 5. Each new product release sees Apple-obsessed gadget fans rush to upgrade their devices. However, some investors are worrying that these Apple events are losing their magic since the loss of Steve Jobs. Yesterday, financial blog Zero Hedge pointed out a poll which showed that 51% of US consumers bought their Apple products on credit - interesting given the current dire unemployment situation and tepid wage growth.

Tomorrow brings the German Constitutional Court's (GCC) decision over the ESM. Market participants appear convinced that the GCC will allow the German President to sign the ESM into law. For this reason, the risk of a negative decision has not been factored in. The other danger is that the GCC insists on complex conditionality. On top of this, the ECB's announcement last week that it is prepared to make "unlimited" purchases of the government bonds of troubled countries could well influence the GCC's final decision. It is worth noting that Bundesbank President (and ECB member) Jens Weidmann was the sole objector to the ECB's bond buying programme, and he is currently being hailed as a hero in the German press.

We also have a Dutch General Election. This is particularly important as the Netherlands (although small in terms of its contribution to euro zone GDP) is a key member of the euro zone "rich club". The most likely outcome is that some form of complex coalition may need to be created, which could mean that it takes a long time to form a government. The last thing that the EU needs now is further political uncertainty.

All this comes ahead of the US Federal Reserve's FOMC meeting which ends on Thursday. The expectation is that the FOMC will announce an additional stimulus package following last week's dismal payroll numbers. Again, this does set the stage for disappointment should the Fed decide to hold off until after the Presidential Election.

US Pre-Open Call

Mon, 10 Sep 2012 15:56:29 +0100

DJIA down 30 at 13,277

S&P down 3 at 1,435

US stock index futures are a shade lower in early trade this morning, as investors prepare themselves for another eventful week. Asian Pacific indices were mixed overnight as investors pondered a number of Chinese data releases. China posted a weaker-than-expected Industrial Production number on Saturday. While there was a bounce-back in the Trade Surplus, a breakdown of the numbers revealed a concerning fall in imports, and slower-than-expected growth in exports. Last week the Chinese authorities announced a package of infrastructure spending designed to boost domestic economic activity. But with each fresh round of data providing more evidence of an economic slowdown, investors continue to anticipate additional monetary easing.

This Wednesday brings a Dutch General Election, a ruling on the constitutionality of the ESM from the German Constitutional Court while the EU/IMF/ECB troika meets in Greece. Investors expect a broadly pro-European Dutch coalition; a decision to allow the German President to sign the ESM into law from the German Constitutional Court and a fudge from the troika - even though there is evidence that Greece has been unable to stick to its austerity plan. So while the chances of an upset may be small, any hiccup could send investors rushing for the exits.

The US Federal Reserve's two-day FOMC meeting comes to a close on Thursday. Following last week's dire non-farm payroll data, the odds on the FOMC deciding to engage in further stimulus have been cut again. Ben Bernanke has made it clear that the Fed is paying close attention the the jobs numbers and that they see the stubbornly-high US unemployment numbers as a "grave concern." However, it is possible that investors are expecting too much from the Fed at this time. After all, US equities are trading at multi-year highs while bond yields are close to record lows. Large Scale Asset Purchases are controversial, and there is a danger that the Fed could become the focus of a major Republican-Democrat argument just weeks ahead of the US Presidential Election. "Operation Twist" continues to run until year-end, so the Fed may prefer to let it run out before firing off another of its treasured policy bullets. If so, then investors will feel let down, and we should expect to see equities retreat from current levels.

US Pre-Open Call

Fri, 07 Sep 2012 08:54:38 +0100

DJIA up 30 at 13,322

S&P up 5 at 1,437

US stock index futures are firmer this morning. Yesterday's strong rally carried through to Asian Pacific markets overnight, and European equities have picked up the baton this morning. This upside momentum has taken the S&P to a fresh four-year high while the tech-heavy Nasdaq is now at its highest level for twelve years. Yesterday's move will have forced a wave of short-covering by investors who have consistently doubted this rally over the summer. The two questions for now are: is there more significant short-covering to come, and will fresh buyers be prepared to come into the market at these levels? If the Dow and S&P can consolidate above 13,300 and 1,430 respectively, then further gains are possible. Buyers would then target their October 2007 highs of 14,200 and 1,575.

Yesterday Mario Draghi gave the markets what they were expecting. Overall, he boosted the impression that the ECB does indeed stand ready to "do whatever it takes" to save the euro. But it is worth noting that the Outright Monetary Transactions (OMT) programme is not like QE. Rather than adding liquidity, it just shifts it around a bit. Although bond purchases are unlimited, they will be sterilised, which means, for example, the ECB will sell German debt to buy Spanish. Countries have to request a bailout and this has to be agreed to by the EU, and maybe the IMF. Mark Grant who writes "Out of the Box" makes a number of points about this: firstly, the country requesting a bailout will then be audited. This audit is likely to show that a particular country's finances are much worse than originally reported - this was the case for Greece, Ireland and Portugal, and there is no reason to think that Spain or Italy will fare any better. Mr Grant believes that this could be the reason why Spain has resisted asking for a full bailout so far.

Secondly, there are countries within the euro zone who are likely to say no to any further requests for help. These include Austria and the Netherlands. Mark Grant makes the point that the ECB has said it won't activate the OMT without the approval of the Stabilisation Funds (EFSF/ESM). Consequently, wrangling and arm-twisting to force agreement from all euro zone member countries could delay or scupper ECB bond-buying. We shall see.

But today we have the latest US non-farm payroll release. One of the main headlines from Ben Bernanke's Jackson Hole speech was that the Fed saw the stubbornly-high level of US unemployment as a "grave concern." The Fed Chairman also left the door open to further quantitative easing. With the FOMC meeting next Wednesday and Thursday, traders will be transfixed by today's release. Should payrolls disappoint, then this will boost expectations that the FOMC will announce further stimulus measures after next week's meeting. The consensus estimate is for a gain in payrolls of around 120,000. If it comes in at 100,000 or below (although look out for revisions to last month's data) then the odds for further QE shorten. This is likely to support risk assets in the short-term. A gain of 150,000 or so is seen as reducing the likelihood of an announcement at this meeting, although some analysts point out that this level of job growth is still pathetically low, and the Fed is more likely to focus on the Unemployment Rate which hovers around 8.3%. However, there are a significant number of analysts who believe that the Fed will talk the talk on easing, but won't take any decisive action prior to the US Presidential Election.

Have a good weekend

US Pre-Open Call

Thu, 06 Sep 2012 08:34:41 +0100

DJIA up 52 at 13,100

S&P up 7 at 1,410

So, as Marvin Gaye used to sing: "What's going on?"

Yesterday saw equities, gold and oil dither about, swinging between small gains and losses, and ending the day little-changed. This was in response to comments, rumours and speculation about what Mario Draghi would announce in today's press conference, and where Germany stood on more central bank intervention.

Today investors look as if they have already made up their minds. US stock indices, precious metals, oil and the euro are all firmer. This suggests that investors believe that they will get everything they want from the ECB - namely, a substantial programme of bond buying which should anchor yields of troubled euro zone countries (Spain, Italy). Investors have got excited at the prospect of unlimited (but sterilised) bond-buying from the ECB. But the devil really will be in the detail. There is talk of the conditionality which would kick in once a country asks for help - something that Draghi is talking about to try and placate the Bundesbank. This conditionality will mean ceding sovereignty to some extent which is why Spain's PM Rajoy is so reluctant to request help. However, if he can persuade Italy's Monti to make a joint request, then the shame is diluted and he may be able to hang on to his position. From Mario Draghi's point of view, buying bonds with maturities of three years or less does not break EU rules against directly financing euro zone economies. However, his argument that shorter-dated bonds "will expire easily" feels somewhat spurious. Also, some may wonder if supporting the shorter end is really going to help - is three years enough to see a turnaround in the fortunes of troubled euro zone countries? In addition, can the ECB enforce any conditionality, when to do so could threaten the break-up of the euro itself - the very basis of the central bank's mandate? So, plenty to consider, and plenty of opportunity for things to could go wrong today, but you wouldn't feel that from this morning's price action.

Also today we have the Bank of England's MPC rate decision, and from the US: ADP payrolls, weekly jobless claims, ISM Non-Manufacturing PMI and crude oil inventories.

US Pre-Open Call

Wed, 05 Sep 2012 15:58:49 +0100

DJIA down 40 at 12,996

S&P down 6 at 1,399

US stock index futures are weaker this morning across the board. Yesterday, the Dow and S&P closed in negative territory but well above the day's lows. Meanwhile, the Nasdaq ended higher boosted by a strong rally in Apple. Investors are getting themselves into a frenzy ahead of Apple's press conference on 12th September when the company is expected to unveil its iPhone 5.

Asian Pacific indices were lower overnight. The Nikkei fell 1% while the Hang Seng closed down 1.4%. China and Australia were also weaker. Investors cut their long-side exposure following poor manufacturing and construction data from the US. Diversified miners also suffered as steel and iron ore prices remain depressed. There is also some fatigue creeping in as further monetary easing from the Chinese authorities has failed to materialise.

But now focus turns to tomorrow's ECB meeting. There have been a number of stories circulating that Mario Draghi will announce a bond buying programme which will target the debt of troubled countries with maturities of three years and below. The ECB president has said that this would be allowable under EU law and consistent with the ECB's price stability mandate. However, even if he can launch such a programme in the face of opposition from the Bundesbank and others, many investors doubt that it will be enough to calm markets for long.

So, the stage is set for disappointment, and sellers are dominating the equity markets this morning. There are no significant data releases out from the US today, so we can expect prices to drift back to support. For the cash S&P we're looking at 1,396 followed by 1,390.