Policy divergence [Video]

The Day So Far…

A fairly quiet morning despite the most intensive day for European earnings season so far. The biggest causalities have been AstraZenca, who fell as much as 16% after a setback in its trial for lung cancer drug Mystic, while German heavyweight Bayer also issued a profit warning downgrading its full-year sales outlook. Away from the equity space, market participants are still digesting the latest FOMC statement from last night which resulted in a dovish reaction for the US dollar and US yields. Despite the upgrading of the guidance surrounding the issue of balance sheet tightening the market took direction from the Fed’s acknowledgement to weakening inflation stating that inflation is running “below” rather than “somewhat below” their 2% target. As such, T-notes still remain elevated from pre-announcement levels with gold roughly $15 higher than at this time yesterday.

“On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below (Prev. somewhat below) 2 percent” – July FOMC Statement

In FX, EUR/USD remains above pivot having held onto the bulk of the move higher seen last night. Helping the pair has been the emergence of a growing divergence in recent central bank rhetoric reflected by the new found optimism in the Euro-zone against the growing uncertainty on inflation in the US. Just before the FOMC announcement yesterday we also saw unscheduled comments from ECB member Nowotny who further fuelled hawkish expectations in the Euro-zone by stating that discussions have now begun about tightening policy.

The Day Ahead…

The US earnings docket is jam packed but despite the number of companies reporting many of the big names have already been and gone, and so although these warrant close monitoring, from an index point of view there has been little direction seen thus far in the futures market.

Given the markets interpretation of the Fed statement last night we maintain our view that this will remain supportive of equities and fixed income today barring anything unexpected occurring. The data to watch will be the US durable goods report at 1.30pm with weekly jobless claims of less importance given the data is tracking at multi-decade lows. NB: Tech giant Amazon reports after the close today.