Fed surprise unsettles markets

Europe

Markets in Europe initially took their cues from last night’s declines in the US, slipping back in the wake of last nights unexpected shift in the timing of a possible rise in US interest rates, however any losses look likely to be limited, while the DAX could well finish in the green.

It’s hard to escape the feeling that today’s weakness seems a little bit of an overreaction given that even allowing for the fact the Federal Reserve has potentially shifted its timeline, they are still buying $120bn of bonds on a monthly basis, though this number is likely to start reducing gradually as we head towards the end of the year.

The insistence was still there that the Fed sees inflationary pressure as being transitory in nature, though last night’s changes suggest they may be starting to hedge their bets a little, and concern may be rising that “inflation could turn out to be more persistent than we anticipate”. The reality remains that the Fed is a long way from withdrawing stimulus, it’s merely seeding the ground for a slower rate, which suggests that investors probably need to get a grip.

The FTSE100 is the worst performer largely as a consequence of underperformance in the basic resource sector where a stronger US dollar is weighing on commodity prices, with falls in the likes of Fresnillo, Antofagasta and Anglo American, as gold and silver prices slide sharply.

On the plus side the travel and leisure sector are having a welcome respite on government plans to open up international travel for passengers who have been double jabbed in the expectation that more countries will open up routes for holiday destinations.

As a result, easyJet, Ryanair as well as British Airways owner IAG are seeing good gains along with TUI, though it should be noted that we have been here before, and that vaccine passports remain a highly contentious topic. Nonetheless something along these lines is likely to be required if anyone wants to travel outside of the country in the not-so-distant future.

Banks are also getting a bid from the prospect of slightly higher rates with Barclays and NatWest Group leading the gainers.

US

US markets took their cues from today’s weakness in European markets, opening broadly flat as investors continued to wrestle with last night’s surprise shift in interest rate expectations, and weekly jobless claims number that unexpectedly edged back above 400k, to 412k.

While last night’s shift was unexpected it would be surprising if the reaction of the last 24 hours or next few days spoke to a significant change of direction when it comes to equity markets.

That being said we might see some softness in the Nasdaq if capital starts to get rotated out of the more highly valued parts of the market into some of the more reasonable valued areas. That might suggest a little bit of weakness in tech in the short term, however there appears little sign of that right now with chipmakers AMD and NVidia amongst the better performers, with the latter posting a new record high. This appears to be as a consequence of Google saying that it would be offering cloud services based on AMD’s Milan server chip which was released in March.

Curevac shares have taken a pummelling after reporting that its vaccine candidate was only 47% effective in early trials.

Electric vehicle maker Lordstown Motors found itself under early pressure after reporting it had no binding orders for its cars, and days after announcing the departure of its CEO and CFO.

FX

The US dollar has continued to make gains in the wake of last night’s surprise shift by the Federal Reserve, moving to its highest levels in over a month against a basket of currencies, with the worst performers being the likes of the Australian dollar due to its exposure to the mining sector.

The pound is also lower, dropping below the 1.4000 level for the first time since early May, however of all the other currencies it does appear to be holding up better than the others, ahead of next weeks Bank of England meeting. There is the prospect that MPC officials might feel compelled to also give a slightly more upbeat outlook for the UK economy, given recent data, as a general rule of thumb where the Fed leads, other soon follow, although that might not be so true for the European Central Bank. Against that background the euro the pound managed to hit a two-month high before retreating.

The Swiss National Bank left monetary policy unchanged and while they were more positive about the outlook, there was no indication that they were looking at altering policy from the current -0.75%, with the Swiss franc sliding sharply, the US dollar moving strongly back above the 200 day MA for the first time since early May.

Commodities

Gold and silver prices have had the shine knocked off them in the past 24 hours, dropping sharply to six-week lows against a resurgent US dollar, with the rise in US treasury yields, also weighing. Platinum and palladium prices have also fallen sharply

Crude oil prices have retreated a little from yesterday’s two-year peaks, largely as a result of a slightly firmer US dollar, however last night’s shift in Fed policy more or less adds confidence to the idea that economic conditions are likely to improve and as such be more positive for oil consumption in the long term. This is likely to limit any downside move.

Lumber prices have also continued their recent falls adding weight to the idea that the recent sharp moves higher in broader commodity prices is transitory. Corn, soybeans and wheat are also seeing losses as well as they continue their retreat from their May peaks.