Indices surge in wake of dovish Fed

Accomodative central banks are proving to be just the ticket for equity markets, with the FTSE 100 20 points higher in morning trading and healthy gains expected for Wall Street later today.

-       US tightening cycle now at an end

-       EURUSD buffeted by ECB and Fed

-       Dixons Carphone struggles to adapt

One dovish central bank in a week is perhaps an outlier, but two is a trend. The Fed has opened the door to rate cuts, with Jerome Powell firmly dovish in last night’s meeting and, crucially, in the press conference as well. Markets were expecting a dovish outlook from the US central bank, but many were loathe to think that the Fed would be even more dovish. That is what they got however, with the possibility of a 50bps move being left to hang in the air. Equally importantly, the outlook does not just depend on a resolution of the US-China trade spat; the dovish shift in the dot plot points to a committee that expects inflation to weaken, providing ample justification for the accommodative outlook. Indices have rallied on the news, while the dollar has weakened, with the latter move resulting in a very frustrating week for EURUSD traders; those trying to sell EURUSD after Draghi’s speech now appear to be scrambling to buy back the pair, as investors seek to guess which of the two will move first, and how fast.

London’s gains would likely be stronger but for weakness in the UK bank sector. A natural reaction to the softer policy outlook has been to sell financial stocks, although if the economy responds as hoped then the banks and asset managers will be more interesting in the long-run. In other news, Dixons Carphone is heading lower once again, as the management promises more pain to come while it presses on with its transformation. The merger that created the firm was supposed to provide the necessary scale to protect it from dramatic change. Instead, it may have created a giant that cannot change fast enough.

Ahead of the open, we expect the Dow to start at 26,718, up 214 points on last night’s close.