UK & Europe
European stocks displayed confidence in the lead up to a US interest rate decision that has the potential to cause substantial dislocations within markets.
UK stocks rose to a four-day high with the FTSE 100 overtaking 6080 with while the rise in Europe was a bit more cautious with the German back above 10,500 but off its highs.
A late fall in the price of crude oil took stocks off their highs but major indices maintained gains in the hopes the Fed will deliver a “dovish hike” to offset some of the uncertainty surrounding the first US rate hike in almost a decade.
Janet Yellen’s Federal Reserve is widely expected to announce an interest rate hike after heavy signalling from policymakers in the lead up to tonight’s meeting. The bigger question mark is over how the Fed pitches the path of future rate hikes via its statement, dot plots and Ms Yellen’s press conference.
A “dovish hike” would take the form of downwardly revised interest rate projections (dot-plots), perhaps by 25bp for 2015 and 2017 and cautious language indicating a shallow glide path for future rate rises. There is some risk to this now very consensus view. A rate hike by its nature is hawkish and it’s a bit counterintuitive to begin raising interest rates and show concern over the economy at the same time.
Job losses amongst senior bankers and a broker reiterating a positive outlook helped Standard Chartered (L:STAN) to the top of the FTSE 100 while Pearson (L:PSON) was a top riser after a broker upgrade suggested the education publisher could use cash from recent asset sales including the FT for share buybacks and other acquisitions.
Supergroup and Dixons Carphone (L:DC) earnings topped expectations, helping shares rise over 8% and 2% respectively.
US
US stocks opened higher on Wednesday with the Dow Jones up over 100 points and the Fed decision very much in focus.
Stocks maintained gains despite the latest US industrial production figures revealing four consecutive months of declines. Factory output plunged -0.6% in November while October was revised down to -0.4%. An industrial recession makes for a pretty unsettling backdrop for the Federal Reserve to begin its monetary tightening cycle.
FX
FX markets were pretty dead on Wednesday with very little movement amongst major currency pairs ahead of this evening’s Fed meeting. The Norwegian krone was biggest loser in line with a drop in the price of Brent crude oil while the Swiss franc was the biggest riser.
The euro rose against the pound after German and Eurozone manufacturing data improved but UK earnings data disappointed. The latest PMI data showed services weakened in Germany and the Eurozone, while manufacturing, a notable drag in the last quarter showed signs of improvement. The UK unemployment rate fell to 5.2% in November but wage growth slowed to 2% from a year earlier, something the Bank of England raised as a concern at its last policy meeting.
Outside of the G10, the Brazilian real dropped significantly after the country’s debt was downgraded to junk by rating agency Fitch. Fitch has forecasted expanding government debts amidst a continued economic slump.
Commodities
Gold prices surged over $13 per oz on Wednesday. It is the biggest jump in the price of gold since the US unemployment report at the start of the month paved the way for today’s rate hike. Gold rising strongly ahead of a rise in US interest rates is on the face of it counter-intuitive. The rally in gold can be explained by 1. Expectations of a weaker US Dollar following a so-called “dovish hike” or 2. Fallout protection in case markets collapse concluding a policy error.
Crude Oil prices fell as much as 2% after a surprise build in US weekly oil inventories. It was the biggest December inventory build in 22 years. The spread between Brent Oil and WTI had tightened after the US congress moved towards an agreement to lift the ban on US oil exports but widened again as both contracts fell following inventory data.
The ban has been in place since 1973. US oil exports are not likely to affect overall market prices but would mean US and global producers selling into the same markets. Global producers including Russia and OPEC countries might have to cut prices to compete with US shale producers who could have room to raise prices. The extra competition for market share from US shale can only add to the pressure on OPEC.
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