FTSE bounces higher despite FOMC threat

Equity Markets Shrug off Fed Fear
By Ipek Ozkardeskaya

Some bet for a first rate hike in September, others have hard time imagining Yellen pushing for higher rates any time before December, while a minority expects both a September and a December rate hike. The US sovereigns still price less than 50% probability for a rate hike before the end of the year. The lack of conviction in the US sovereigns could trigger a rapid hike in US yields should the Fed’s step toward a more orthodox policy concretize.

The size of the rate hike will matter.

Whether the Fed starts normalising in September or in December, the size of the first rate increase will be the most important indication regarding the FOMC’s future intensions. The Fed will likely opt for an early, but 10-15 basis point hike in order to pull the trigger and wash off the speculations building around the timing of the first hike.

The trade-off between the timing and the size of the Fed normalisation explains the reluctance in the US treasury markets. The 10-year yields remain below 2.50% despite the increasing number of Fed-hawks, well away from 3.00 – 3.50% eyed before the Fed dots hinted at a twice slower ride back in March.

Growing divergence with antipodeans

The divergence between the Fed outlook versus the RBA and RBNZ explains higher volatility in the Antipodean complex.

The downside potential has been well absorbed in AUDUSD over the past three weeks, a new catalyst is needed for a sustainable extension below 0.7260/50 area. The FOMC should help in distinguishing the short-term direction. Below 0.75 pivot, the bear market should deepen toward the 0.70p mid-term target, whereas a bounce above this level is expected to push for an upside correction to 0.7605/0.7710 max (Fib 38.2%/50% retrace on May-Jul sell-off).

While the RBNZ prepares for another 25 basis point cut in September, potentially at the same time then the first Fed hike. The Kiwi should then keep the title of ‘worst G10 performer’ since the beginning of the year and carry on its advance toward 0.60 mark.

FTSE bounces higher despite FOMC threat.

Equities Highlights from Head Analyst Brenda Kelly:

The FTSE shows all sectors in the green this morning. The lack of fear ahead of the FOMC rate decision is interesting yet for the most part, the rallies in the FTSE of late have tended to die out as quickly as they begin. We have however seen some decent company earnings and trading updates this morning and in what will likely in the near term become a wholly stock-pickers market, this bodes well.

British American Tobacco (+2.97%) Again the currency headwinds remain a recurring theme. This, along with people cutting back on smoking is to blame for lower revenue from BAT for the first half of the year which fell 5.9% to £6.4bn. An increase in dividiend should keep investors happy from 47.5p to 49.4palong with a fairly upbeat assessment of the coming second half.

Hikma Pharmaceuticals (+3%) Once again, topping the FTSE on a broker upgrade and further developments on the purchase of Boehringer Ingelheim’s Roxane which will boost its presence in the US. A price of $2.65bn is indicated.

Compass Group (-4.05%) A trading update from the group indicated that sales in Q3 were slightly lower than the rest of the year. Revenue growth in the third quarter to the end of June was 5.1%, slightly slower than the 5.5% growth it registered in the first nine months of the year. The company has confirmed that restructuring charges will need to be booked to some offshore and remote business. Costs related to this are expected to be around £20/25m per year. FY operating margin will be broadly flat as a result.

Barclays (+2.54%) More money is being set aside to cover the costs of probes and litigation, this time an additional £600m. This makes a total of £2bn pounds set aside by the bank to cover mis-selling PPI. The new CEO has pledged to speed up asset disposal and cost cutting. Even going to so far as to say that he aims to double the share price in the next 3-4 years. The near term target price from a fairly bullish broker outlook is 295p.

Antofagasta (-1.88%) It’s been a tough year for the mining company with steep falls in base metals cutting into profit margins. A cut in its copper output for the second time this year results in a FY copper production guidance to 665,000T. Average target price is 705p with most brokers sitting on the fence. With the share price already at 5 year lows, it will take a brave investor to get involved at the current price.