US dollar softens as Fed-hawks retreat

FTSE outperforms as oil, metals recover
by Ipek Ozkardeskaya

Asian currencies were better bid as Chinese officials announced to take further stimulus measures in terms of fiscal and monetary policies. The optimism gave a boost to commodity and related assets. Shanghai’s Composite recovered earlier losses in the session and traded 0.26% higher, Hang Seng gained 0.18%. Oil rebounded to $36.

The FTSE outperforms its European peers as energy and mining stocks ride on the back of a bull.

BG Group is the top gainer in London (+2.93%) following a broker report bringing up the oil prices as a barrier to Shell-BG deal. Oil cheapened by more than 40% since the announcement in April and the takeover may not go through as Shell’s power to seal the deal tanks alongside the oil prices. BG and Shell shareholders will meet on January 27th for approval. Should the debasing in the oil market continue, the scepticism and the uncertainty could further mount. Investors that have moved capital from BG to Shell stakes could partially swing back to their BG holdings.

ITV traded 1% down as Comcast rejected news on talks to buy ITV.

US dollar softens as Fed-hawks retreat

The US dollar is paring the post-FOMC gains as the market doesn’t see another rate hike until April 2016 the earliest, meaning that the projection of four Fed hikes (of 25bp to sum to 1%) is being somewhat pushed back due to a gloomy macroeconomic picture. The US GDP, core PCE and personal consumption (3Q third read) is due today, and will either give reason to the Fed, or revive further scepticism regarding the US’ economic health.

Thin liquidity conditions could be a source of higher volatility as volumes decline before Christmas holidays.

Turkey expected to hike by 50 basis point

Turkey's Central Bank is expected to rise the benchmark repo rate by 50 basis points and to tighten the overnight lending / borrowing corridor to 7.75%/10.75% from 7.25%/10.75. While the Fed tightening is the main trigger of the CBT’s policy adjustment, the move will certainly be the first in a series of a broader modification at the heart of Turkey’s monetary policy. Turkey’s Central Bank is preparing to step away from its complex, multi-rate strategy and to adopt a more transparent, singular policy to improve efficiency in communication.

Today’s modification is not a significant rate tightening per se; it is the first step toward a symmetrical and a tighter overnight rate band around the benchmark repo rate. The central bank will certainly keep the average funding cost steady and avoid the market from taking a hit. The bank is expected to gradually tighten the monetary policy in order to prevent an overheating in inflation and adjust the risk premium to rising geopolitical risks. It is noteworthy mentioning that the CBT will move at moderate pace given that the political pressure is there to stay; President Erdogan remains favourable for lowering rates to support economic growth, somewhat contradictory to the fundamental picture.