Europe
There was an underlying confidence in European trading today in the expectation that despite ending its quantitative easing program the Federal Reserve will keep monetary policy accommodative for a considerable period of time.
The upcoming Fed meeting overshadowed a bigger than expected slowdown in mortgage approvals in the UK and profit warning from Next (LONDON:NXT).
The new mortgage regulations implemented by the Bank of England have cut some prospective buyers out of the market and limited others in the size of the mortgage that’s obtainable. This has tipped the balance a little between buyers and sellers and house prices have come down accordingly since the summer.
For now the slowdown in UK mortgages given would appear to be directly related to new regulations on lenders but if the economic recovery continues to cool and house prices continue to slip then the slowdown in mortgages could reflect a genuine decrease in demand for housing.
One of the country’s top retailers Next has warned on full-year profits and sales blaming an unseasonably warm autumn. The results don’t appear to reflect any underlying weakness in the business and the company is set to benefit again from the rise of “click and collect” shopping this Christmas.
The Serious Fraud Office will begin an investigation into Tesco (LONDON:TSCO)’s profit misstatement leading the FCA to cancel its own investigation. Shares in Tesco traded higher despite the criminal investigation given that its own investigation suggested there was no criminal activity because the suspension of bonuses during the period meant there was no incentive to do so. That assertion maybe a little misleading since there are always pressures to perform especially at the C-level when the company is underperforming and jobs are on the line.
Deutsche Bank (NYSE:DB), like UBS (SIX:UBSN) had its third quarter results impacted by higher legal costs, potentially related to LIBOR and FX market manipulation as well as mis-selling MBS and breaching US sanctions rules.
US
Markets in the US essentially flat lined in early trading with the Federal Reserve set to end its quantitative easing program today as Facebook Inc (NASDAQ:FB) lowered its profit outlook for the fourth quarter.
The FOMC meeting will probably be a non-event insofar as nothing unexpected will happen particularly given there is no press conference where any home truths about the timing of the next rate hike could pop out.
Facebook shares traded lower after guiding lower for the fourth quarter and projecting to increase spending next year. It seems earnings expectations have reached an unsustainable level and the company is now guiding lower so it can increase costs and invest in the future of its business.
There does appear to be a raised bar for what companies have to do to impress this reporting season, valuations are high and QE is ending so more is being expected from earnings. Highly valued tech stocks which have missed estimates are being severely punished, Amazon (NASDAQ:AMZN), Twitter (NYSE:TWTR) and now Facebook (NASDAQ:FB) being the prime examples.
FX
The US Dollar was lower against most major currencies today in anticipation that the Federal Reserve will maintain its dovish bias in its October statement.
Both the British pound and the euro appear to be basing at current levels, concerns voiced by Fed members over the strength of the US dollar in the September minutes have tempered the idea that the Fed will be the first in the G7 to hike rates.
Commodities
There was some divergence in the commodities space today with crude oil trading higher as might be expected in the weak dollar trading session and in light of lower inventories than expected.
However gold fell back to two week lows. Gold has been in a tight range since Thursday so today’s move may fade back into the range after flushing out a few weak traders long the market. The end of QE means the US dollar is no longer being devalued and is bad for gold as an inflation-hedge but the announcement has been well-telegraphed and should be priced in.
The sideways action in gold over the last year reflects traders indecision over its future. If the Fed stays dovish then stocks could rally which could pressure gold but a more dovish outlook means a rate hike would be delayed and is positive for gold as a non-yielding asset.
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