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US indices hit fresh record highs

By David Morrison  |  04/01/2018 16:08

”bullmarket”/
In focus
Traders will be keeping a close eye on the release of the minutes from the Fed’s last monetary policy meeting in mid-December. This was when the Federal Open Market Committee (FOMC) raised rates by 25 basis points for the third time in 2017. This was widely expected. However, the FOMC’s Summary of Economic Projections were viewed as being less hawkish than some had expected. This was principally because committee members forecast 75 basis points worth of rate hikes this year (unchanged from September’s “dot plot”) rather than 100 basis points anticipated by a number of analysts. The FOMC also upgraded its 2018 growth forecast while anticipating that the Unemployment Rate will fall below 4.0% for the first time in over seventeen years.

The US dollar fell in the immediate aftermath of the statement and this also proved to be the turning point for precious metals which have rallied ever since. Should today’s minutes suggest a more hawkish bias from the Fed than that in last month’s statement, then we should expect the dollar to rally and precious metals to decline.
 
S&P inches above 2,700

US stock indices made another strong upside move yesterday which took both the S&P 500 and NASDAQ Composite up to fresh record highs. The buying has continued throughout today’s session taking the European majors higher as well. In the absence of a pull-back we should also see the Dow Jones Industrials and NASDAQ 100 push above their own record closes made in the middle of last month. The moves look to be extensions of the rally seen last year. Corporate earnings continue to surprise to the upside and, despite some hiccups, Trump’s tax reforms (including the slashing of corporation tax to 21% from 35%) passed through Congress before the year-end as the president promised. Overall the reforms are viewed as extremely positive for US corporations, even if many firms had already found effective ways to minimise their tax payments. Brinks-and-mortar retailers should benefit while overseas earnings from multinationals will also be repatriated. In the current economic climate this money is unlikely to fund investment in new plant, machinery or staff training. However, there’s every chance it will be used to finance stock buybacks and dividend payments, so increasing the attractiveness of equities, even at these historically high levels.
 
FX

The US dollar was busy making gains versus all the majors today and the move picked up as we approached the European close. The dollar rally went contra to the recent trend which has seen the greenback come close to retesting the multi-year lows it hit in September. There was no particular reason for today’s move with the consensus view being that it was nothing more than a bout of profit-taking. If so then we should expect the dollar to continue its decline – at least until it seriously tests significant support levels, or unless tonight’s release of minutes from last month’s Fed meeting prove more hawkish than anticipated. Yesterday the EURUSD came within a few ticks of the high hit back in September, just below 1.2100. Meanwhile, the Dollar Index has yet to retest support around 91.00 although the GBPUSD pulled back sharply after briefly nosing above the 1.3600 level.
 
Precious metals

Gold and silver gave back some of yesterday’s gains in early European trade this morning as the US dollar staged a modest recovery. Despite this, gold seems relatively comfortable above $1,300 while silver continues to dig in above $17 per ounce. But gold and silver have risen 6.5% and 9.5% respectively since hitting multi-month lows in mid-December. Consequently, we shouldn’t be surprised to see both markets consolidate or even pull back sharply from current levels, particularly if the dollar stages a comeback following its latest sell-off. There’s some decent support for silver around $16.60 and for gold at $1,300 and $1,280.
 
Crude oil

Oil prices continue to clock up significant gains even as both the WTI and Brent contracts retest or close in on significant areas of resistance. WTI has begun to pull away from $60 per barrel – a level considered significant for US shale producers – and testing a band of resistance from around $60 all the way up to $63. Meanwhile, Brent is now trading at highs last visited in May 2015 and appears to have $70 per barrel in its sights.
Last week the Energy Information Administration (EIA) reported an unexpected decline in US production together with a larger-than-expected drawdown in US inventories. Oil prices are also getting support from the demonstrations taking place across Iran - the third-largest producer in OPEC. However, there is no evidence that this political unrest has had any impact on Iranian production while December’s North Sea Forties supply outage has now been resolved. Consequently, there is continued speculation that crude prices are overdue a pull-back. This could come should there be any evidence that higher prices are spurring on US shale production. 
 

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