FTSE higher led by financials

The Fed to launch in December
by Ipek Ozkardeskaya

The US nonfarm payrolls greatly surprised on the upside in October. The US economy added 271,000 nonfarm jobs last month, compared to 185K expected and 142K a month ago. The wages grew at the pace of 0.4%m/m, well above 0.2% m/m, from 0% last in September. The astonishment in US jobs data triggered a broad based rally in US dollar. Last week’s CFTC data showed that speculative USD longs surged to the highest levels since mid-August.

The Fed is preparing to normalise and the market is getting used to the idea of a Fed lift-off by the end of the year. The expectation for a December Fed rate hike surged to 68%.

Following the figures, important technical levels have been breached.

Could euro depreciate to parity?

EURUSD took a dive down to 1.0707 on the surprisingly stronger NFP read on Friday. The euro is now clearly oversold against the US dollar; therefore some correction is healthy at the current levels. However, the attention shifts to 1.0500/1.0450 zone now and traders will be chasing top selling opportunities to strengthen their euro short positions moving toward December. Should a potential Fed rate hike is accompanied by an additional expansion from the ECB, the euro-dollar could even target the parity in three to six month period.

Pound to slip below 1.50

The pound weakened 3% over the past week on the combination of the dovish BoE (QIR) and a strong jobs data out of the US. It is just a matter of time before a slide below the 1.50 mark as the BoE hawks have relaxed properly, to a point where the expectation for a BoE rate hike has been pushed as far as in 2017. The general belief regarding a fair 6-month delay between the Fed and the BoE policy normalisation has vanished. Cable is expected to extend the bearish trend as long as the 1.5208 resistance holds (major 38.2% on last week sell-off). Below 1.50, the mid-term support could be found at 1.4888 (minor 76.4% on Apr-Jun rise) before 1.4566 (April dip).

Gold: $1000 on the radar

Finally gold slipped to $1085 with prospects of further cheapening to $1080. As the US yield curve steepens, the short-term allocation to gold – which pays no interest – is expected to be affected. In this context, a further sell-off to $1000 as USD long positions are built is well on the cards. In longer-term however, with the US inflation target expected to improve toward the Fed’s 2% target rate, the gold demand as a hedge against inflation will certainly safeguard investors’ appeal in gold.

FTSE higher led by financials.
by Brenda Kelly

With little in the way of corporate earnings today this side of the pond, the market is now ultimately focused on the prospect of a US rate hike. Last Friday provided a real boost to the December campers with 271,000 jobs added in October and wages growing twice as fast as expected. A single monthly data point, good or bad, should not be relied on as pivotal and one decent jobs number should not be taken as the main deciding factor for Janet Yellen. External headwinds could also pose a problem to tightening. The IMF’s Christine Lagarde is also somewhat concerned that the Fed may move too quickly and have to reverse course – which would not bode well for economic confidence. Since 2008, no central bank has successfully raised rate and managed to sustain the tightening. While the market now prices in a 68% chance of a rate hike for December, the jury is still very much out.

For the time being, the prospect of the US embarking on a tightening cycle has been deemed positive by market participants with financials, energy and materials pressing higher and leaving the defensive equities unable to catch a break.

Even a fairly impoverished Chinese trade balance has failed to dent the risk on attitude today as it may mean additional policy easing and potentially another cut to the RRR rate. Commodities tell the real story and the fact that copper prices continue to slide, losing further ground below the $5000/T marker tends to underline the struggling growth in the second largest global economy.

A hawkish Fed will likely continue to hurt any attempts at a recovery in global commodities and even oil, having taken a hit on the back of the burgeoning US dollar last Friday, losing 2% at one point is showing some semblance of a recovery this morning. It may not be able to keep the weak-at-best momentum going should the dollar continue to rocket. Already speculative longs in the greenback are at levels last seen in mid-August.

Intraday, the upside is aiding oil stocks with BP and Shell both adding 1.13%.

Here in the UK, the CBI announced a "modest" downgrade in its forecast for this year, saying it expects the economy to grow by 2.4%, compared to an earlier prediction of 2.6%, and by 2.6% next year, down from 2.8%. Mark Carney’s less than buoyant outlook for the economy and his failure to (at present) to make good on his guidance that monetary tightening could take place at ‘the turn of the year’ has had a contagious effect- and not for the better.

The pound has been under pressure for the past week or so what with the divergences in both the perceived paths of the individual central banks and the rush to the dollar, the $1.50 level is holding as support. Clearly global financial stocks are going to benefit in terms of positive net interest margins should the Fed actually do the deed and this is reflected in the moves in HSBC (+1.61%) this morning once again which is adding to Friday’s gains. Standard Chartered, despite being cut to hold at Maybank and being placed on review by Moody’s for a long term ratings downgrade is up +1.85% and leading the charge.

Aberdeen Asset Management (+1.84%) and Barclays (+1.79%) are all amongst the top 5 spots on the FTSE leader board this morning.

UK utility stocks are out of favour this morning owing to some broker downgrades.

Already cut to underweight at Morgan Stanley last week, SocGen has weighed in on the United Utilities this morning downgrading it to hold form buy. The stock has fallen 1.62%.

Severn Trent is lower by 1.8% following a downgrade to underperform from Exane.

We call the Dow lower by 40 points to 17870.