Cheerfulness from the Fed

FTSE sheds 1% with miners in free fall
by Brenda Kelly

Bullish for US indices perhaps but the Fed statement and the hint that a hike in December was possible has done little for the FTSE this morning which is trading lower by just over 1% as I write.

Miners remain in the bad books and even the precious metals companies which outperformed yesterday have been unable to garner any upside. The Fed hint that it may hike in December has been to the detriment of all commodity prices as the dollar index surged ahead in the wake of the statement. For now, the market seems fairly confident that December is literally D-Day; but then the market was pretty confident back in September too.

Gold has declined significantly to $1158/oz and thus Randgold (-4.4%), Fresnillo (-3.19%) and Anglo American (-3.75%) are giving up the gains witnessed yesterday and then some. All in all, the metals and mining sector has nabbed some 16 points from the FTSE index in early trade. Anglo American now trades at an all-time low with shares exchanging hands for 562p and the stock has shed a whopping 58% since trading hitting its 52 week high back in February.

Copper and oil are also under some slight pressure on the back of the surge in the dollar overnight. The dollar index now trades at 97.40 but would need to surpass the 98.40 level to ultimately break towards the highs seen last February.

European banks are leading the way lower too with the sector down 1.57% overall. Barclays (-5.7%) and pulling a 14 points off the FTSE Pre-tax profit, including restructuring costs fell to 1.43 billion pounds from 1.59 billion pounds in the year-earlier period. Barclays has set aside £560M for FX/US mortgage compensation. The bank has cut the target for its core return on equity to 11% from 12% for 2016 because of restructuring costs.

Deutsche Bank shareholders initially seemed to be taking the net loss of €6bn in the three months to the end of September in their stride but now trades down 4.8%. Dragged down by €7.6bn of exceptional charges, Deutsche has set aside €1.2B for litigation charges and is set to exit 10 countries and cut jobs to restore profitability. Deutsche will withdraw from Denmark, Finland, Norway, and Malta. It will also exit from New Zealand.

The effects of the oil price rout continue to be manifested. Royal Dutch Shell (-1.49%) reported its largest net loss in around 10 years - a loss of $6.1bn (£4bn) for the third quarter after taking a $7.9bn (£5.2bn) hit. The combination of asset write downs and lowering of oil price expectations. Shell said it had taken a $2.6bn (£1.7bn) hit on the recent decision to abandon drilling off Alaska as well as $2bn (£1.3bn) for another cancelled operation, in Alaska.

We are calling the Dow 71 points lower 17708.

Cheerfulness from the Fed
by Ipek Ozkardeskaya

How happy for the FOMC, they could get over the recent concerns on the global economic slowdown.

The Fed maintained the status quo at this week’s meeting as expected, yet kept the possibility of a rate hike on the table for its December meeting. Interestingly, the Fed dropped its apprehension about the global economic slowdown in its communiqué and brought the focus back on the US labour market and its mid-term inflation target.

Despite the misplaced cheerfulness from the Fed, the feasibility of a December rate hike should be questioned. Could the Fed realistically close its eyes before the rout in the emerging economies as well as the energy and commodity markets? Isn’t the Fed’s manoeuvre margin too tight to make a mistake on the timing of its policy normalisation? Will a December hike be a contaminated by political issues, as the US walks into the critical election year?

The normalisation is data dependent, the other central bank actions should be included in this whatever data the Fed is looking at. It is not only about the US jobs market, the US inflation and the US growth. The rest of the world matters. And we have read it in the weak US durable orders this week and may further confirm it through a weaker third quarter GDP read, expected to be revised down to 1.5% quarterly annualised from 3.9% printed previously.

As a knee-jerk reaction to the hawkish Fed, the US dollar gained across the board, the US swap curve steepened and the 10-year government bond yields rose to 2.10%.

We have seen the euro slipping below 1.10 against the US dollar and there is some profit taking this morning. The improvement in the risk sentiment could well enhance the appetite in euro as funding currency and keep the pair within a reasonable 1.08/1.10 range for the moment yet the ECB seems to be well armed – and utterly determined - to prevent the euro from appreciating. So we can say that the bearish trend is expected to strengthen and that the trend will be euro traders' friend to the end of the year!

Tell us more, BoJ

The Fed hawkishness could prevent the BoJ officials from rushing toward additional monetary stimulus this Friday.

A sustainable improvement in the US yields, with 10-year yields back on their path to 3% in line with an upcoming Fed normalisation, is expected to be supportive for the US dollar against the yen. Even if the BoJ decides to keep its hands clean from an additional cash injection, the USDJPY has the gate open to a revamp toward the 124-125 levels.