UK Market Comments

US markets have held their ground in opening trading, but the FTSE 100 remains in the red as the clock ticks down towards the referendum.

UK markets

Fed tremors and the independence debate are still conspiring to keep the FTSE 100 down today, and the downward scenario will likely maintain the upper hand at least until the Fed meeting is off the agenda. The 6780 level has been vigorously bought once again today, mirroring the market’s reactions earlier in the month, so there is a clear line of thinking that argues that dips should still be bought. Tullow Oil has plumbed new depths for the year today, striking below the 700p level for the first time since 2009. This once great explorer has seen its shares halve since 2012, but even now valuation metrics still seem to point to better opportunities in the sector, even if the company is sitting on vast reserves that mean its potential value is much higher than the share price currently indicates.

US markets

The recovery of 17,000 by the Dow yesterday evening confirms that there are still those waiting to enter the broader uptrend when opportunity presents itself, even if pre-FOMC jitters stayed some people’s hands. With the FOMC meeting, the key part will be the statement, but Janet Yellen still seems to be erring on the side of caution where interest rate hikes are concerned. The wording can do much to calm fears about the Fed being behind the curve, but her actions (or lack thereof) will speak louder than the words on the page. Ms Yellen knows that investors still need to fully adjust to a world of slowly rising rates, and that many haven’t made their piece with this idea just yet. The Alibaba IPO looms too, with our grey market having dropped back slightly today to a mid-point of $207 billion. Expectations are huge for this offering, but with a significant block of shares destined for company employees the worry will be that the eventual expiration of the ‘lock up’ period will see an undignified rush for the exits if the IPO goes well.

Commodities

Combine US rate speculation and a surging dollar with worries about Chinese economic growth and you have a potentially nightmarish scenario for commodities in the final quarter of 2014. The rout in commodity markets in recent weeks could be a mere prelude to further losses should the Fed opt to drop ‘considerable time’ from its statement in relation to the period between the end of QE and the first rate hike. For gold, a close below $1240 again today shifts the focus back to the December 2013 lows around $1190. Brent is enjoying an oversold bounce back towards $99, but we can expect the negative correlation to reassert itself with a vengeance if the Fed statement is more hawkish.

FX

UK CPI had but a passing impact on GBP/USD today, although it was yet another piece of evidence to reinforce the idea that a rate hike is not in the offing for some time to come. Instead, most traders are opting to sit on their hands and await developments, leaving the field clear for the brave souls at the NIESR to opine that a new currency might be the best bet for Scotland if it were to renege on its share of the UK national debt. Such comments will be unwelcome in the ‘Yes’ camp, but it is the kind of sensible commentary that will be needed if the independence vote is passed. Rancorous argument helps no one.