UK benchmark continues upside momemtum

Euro slides on more spending for Syrian attacks, WTI gains
by Ipek Ozkardeskaya

The euro is under pressure as France dismissed budget goals to counter-attack Syria.

The expansion in French budget for war in Syria, combined to prospects of a further unorthodox move from the ECB, could only cheapen the euro and with a bit of luck, support the inflation expectations in the Eurozone. Presently, the euro 5-year/5-year inflation swap rate, used by the ECB as a proxy for inflation expectations, stands at 1.75%. The ECB’s mandated inflation target is 2%. Mario Draghi will almost certainly not be stepping back from expanding the present QE program or going negative on deposit rates before reaching his goal. The core inflation improved to 1.10%y/y in December, hinting that the current policy is bearing fruit. The improvement did not revive any suspicion regarding the possibility of further monetary expansion by December. It seems that the recent ECB communication has been a success in terms of credibility.

The euro slipped below 1.0650 against the US dollar and is decidedly on its way to 70 cents against the pound.

Before the FOMC minutes due on Wednesday, traders continue chasing top selling opportunities to strengthen their euro short positions. In December, an additional expansion from the ECB could well be accompanied by a potential rate hike by the Fed. Such combination could resume a mid-term slide in the euro down to parity against the dollar.

Digging into the guts of the TIPS market, we notice that the US monetary conditions have been continuously tightening since April. The market gives 66% chances for a December Fed rate hike. The FOMC minutes on Wednesday could further support the Fed hawks. The Fed divergence will likely be supportive of the US dollar to the end of the year. The US inflation data is due later in the day. The headline inflation may have improved to 0.2% in the month of October, the core inflation is seen stable at 1.9% on year.

The speculative future long positions in US dollar rose to the highest since mid-August; as the yen, the euro, the pound, the Aussie and the Kiwi were sold last week.

The Loonie has been the exception as some shorts were covered. The USDCAD is again set to advance to fresh eleven-year highs on the back of a strong USD and cheap oil. Further cheapening to 1.35 per US dollar is a matter of time.

Crude is better bid however given that French retaliation against Syria could damage the supply side but could hardly reverse the oversupply conditions in the global oil market. The crude inventories in the US are back on their way to all-time-highs. The oil market could easily be handed back to the bears and the WTI futures may be susceptible to a move below $40 per barrel.

UK benchmark continues upside momemtum
by Brenda Kelly

The rise in the FTSE over the past two days has certainly shown a certain amount of resilience in the markets but it does have to be taken in context with the declines of last week. The UK benchmark has yet to retrace back to last week’s highs around 6380 and still remains some 130 points below this.

Still, each sector is very much trading in the green this morning with some of the travel related and airline stocks bouncing back to some degree after yesterday’s selling.

Ryanair (+0.42%), IAG (+1.3%), Carnival (+1.92%)

The notable exception being EasyJet (-2.64%) which reported its fifth record year of profits. Annual profits at the carrier jumped 18% to £686m.Revenues rose 3.5% to £4.68bn, with passenger numbers up 6% to 68.6 million in the year to end-September. The figures do not include any possible impact on Easyjet services to Egypt after last month's Russian jet crash.

News that Aldi and Lidl had finally grabbed 10% of the market share was a double edged sword for the supermarket sector. Tesco (+2.23%) was upgraded to buy at Credit Suisse. Despite losing market share from 28.7% to 27.9% and sales being down 2.5% in 12 weeks y/y/, the bank believes that Tesco has the scope to be more competitive and rebuild profitability.

Morrison (+0.33%) Sales fell 1.8% in 12 weeks – the company also lost market share to 16% from 16.1% as Sainsbury (+2.55%) which was the only of the Big 4 chain to increase sales over the same period.

The surge in the energy stocks sector has held some momentum from yesterday despite the fact that oil prices shed much of the early gains yesterday. The temporary bounce should be attributed to technical buying and some short covering.

The supply glut and the weaker global demand is still expected to weigh on the oil price in the near term and the stronger dollar on speculative bets on a December rate hike will likely exacerbate the downside which will keep any real concerns about burgeoning inflation levels at bay for some time.

Price pressures in the UK remain somewhat benign with CPI falling 0.1% in the year to October 2015 and showing that the annualised cost of living in October stayed negative for the second consecutive month. Clothing price growth was negated to some extent by falls in the price of alcohol and tobacco.

It would seem that the Bank of England’s most recent quarterly inflation report was on the money and the outlook for 2016 seems to have a base case that the risks to inflation remain to the downside.

German Zew investor expectations was higher than expected but current conditions saw the index fall to 54.4 versus the 55 print expected. The Dax, having already opened higher this morning continues to forge northwards. Some 200 points shy of the 11,000 metric, it will be interesting to see if this level, which served as a barrier over the past month will finally be breached.

Later sees the release of the US CPI and while there are expectations for an improvement to 0.2% gain on the month – anything higher than this will likely ramp up market expectations for a rate hike. Industrial production is unlikely to set the market alight with an expectations for a gain of 0.1%. Market probability is presently at 66%.

The Dow is slated to open 45 points higher to 17530.