Europe
After a series of important data releases this morning, European stock markets were trading with mixed results ahead of the all-important Fed meeting after the markets close.
Mainland shares received a lift from the small uptick in Eurozone inflation that offered some hope that the continent can avoid deflation. The German DAX did not respond too well to comments out of Ukraine on the possibility of a ‘significant’ drop in Russian gas exports to Europe. The FTSE 100 is under pressure as the Scottish vote approaches and from labour market data pointing to a sooner rate hike.
The miners and house builders were on top risers in the FTSE 100 while brewers Sabmiller (LONDON:SAB) and Diageo (LONDON:DGE) pulled back from the recent prospective merger-induced rally.
Stimulus efforts from China have upped the chances of increased resource demand. In the Chinese banking sector the situation is somewhat different to Europe where there is a question of underlying demand for bank loans.
The top Chinese banks have been under pressure to increase capital buffers and existing bad loans have prevented them from making new ones. It’s reasonable to assume the 500bn yuan should make its way straight from the banking sector into the economy.
There were no more dissenters at the Bank of England and the existing two Martin Weale and Ian McCafferty will not be on the committee next year suggesting a rate hike may still be some way off and probably not this year.
UK average earnings increased by 0.6%, jobless claims dropped by 37.2K and the unemployment rate fell back to 6.2%. The UK labour market data was better and this helped a rally in the British pound but the FTSE 100 was unconvinced as Bank of England minutes seem to suggest most members see a moderation in Q4 thanks to the slowdown in the Euro-zone.
Vodafone Group PLC (LONDON:VOD) shares were higher on reports that it and EE have been in touch with liquidators of Phones 4 U on buying up assets including shops, staff and inventories. Phones 4 U founder John Caudwell described the companies as “ruthless” and probably hasn’t altered his opinion on the news they are picking on the Phone 4 U carcass after “moving in for the kill”.
Smiths Group (LONDON:SMIN) shares were big fallers after the company reported a 5% drop in revenues.
US
US stock markets remained bid going into the Fed meeting after a moderation in consumer price inflation added to a new-found belief the FOMC will air on the side of caution on the timing of the next rate hike.
A potential change in forward guidance was a major cause of the recent consolidation in US stock markets so if there is no change in policy language; it could trigger the next leg higher in the bull market.
The Fed and its Chair Janet Yellen have been taking a more neutral stance as of late and there has been one dissent to the use of the language “extended period of time” but this meeting may not prove to the one where the Fed need to make any bold changes.
The unemployment rate slipped back in August and only 142K jobs were created, industrial production weakened and if today’s inflation data shows a moderation then the pressure on the Fed to get more hawkish should if anything be abating.
There are other ways the Fed can enhance a more neutral stance though, the most obvious would be an increase in the forecasts for the level of the fed funds rate by year end of 2015, 2016 and now 2017.
The Fed could change some other language for example cut the drop the “significant underutilization of labor resources”, it could provide an update on an “exit strategy” for how it will end QE and Janet Yellen may also choose to tone down her dovish rhetoric in the press conference.
FX
The US dollar was mostly higher going into the Fed meeting but lost out to the British pound after positive labour market data. The Canadian dollar was still receiving some interest after yesterday’s manufacturing sales data despite a drop in oil prices today.
GBP/USD easily cleared 1.63 in early trading but pulled back from its highs after BOE minutes demonstrated a more moderate attitude towards the UK economy.
USD/JPY was pushing right into its highs at 107.40 with the dollar expected to strengthen and weak forecasts from Sony demonstrating a flagging Japanese economy in need of more monetary stimulus.
Commodities
GC traded in a tight range looking for a big break-out post Fed.
A large uptick in US crude inventories to 3.7M against an expectation of a fall of -0.9M sent Crude Oil lower back towards $94 per barrel while Brent Oil flirted with $98.
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