Financial market research and analysis

Oil the saviour before the Fed

Trading was muted on Wednesday as markets awaited a likely US interest rate hike and the first test of the populist uprising in 2017 via the Dutch election. Stocks could spring to life on tomorrow’s open once the Fed has made its move and the Dutch election result is known.

A dead cat bounce in the price of oil after a string of sharp daily declines came to the aid of stock markets with energy the top rising sector. Having sold off during earnings season when oil prices were flat, energy stocks have outshone the underlying commodity in the recent decline.

Bank stocks were in demand as investors positioned for the early stages of a higher interest rate environment. The Euro Stoxx 600 bank and oil & gas indices were both up over 1% on the day.  As a sector, European banks have recovered from being negative year-to-date to making multi-year highs this week.

Hikma Pharmaceuticals was the top riser on the FTSE 100 after reporting a smaller than expected fall in profits and lifted its full year dividend. Gold prices near six week lows ahead of the Federal Reserve meeting meant gold miner Randgold was bottom of the heap.

A rise in oil stocks tipped US stocks into a positive open but volatility was low leading into the Fed meeting.

Early morning Sterling spikes

Two consecutive days of sharp moves in the value pound around 6am GMT, to the downside on Tuesday and to the upside on Wednesday, is indicative of the mixed beliefs among traders over the impact of triggering Article 50.

On Wednesday, data showed UK unemployment hit its lowest since 1975 but moderating wage growth that accompanied it meant there was a sell-off in the British pound. The central worry after Brexit is the squeeze on living standards from inflation outstripping wages so the negative reaction in the pound makes sense. Still, the declines after the data only erased some of the early morning gains, leaving Sterling higher on the day.

As GBP approaches the 1.20 handle, two stark viewpoints on Sterling come into view. 1) Brexit is priced in and we are carving out a bottom 2) Negotiations on exiting the EU will show the true magnitude of the problem and more downside is to come.

The Fed’s take on reflation

The US dollar was lower as caution set in before the Fed meeting. At her semi-annual testimony, FOMC Chair Janet Yellen made clear that the Fed would not base its monetary policy on speculation about Donald Trump’s spending plans nor would she wait for Trump’s administration to announce a clear policy agenda to act.

It’s clear that the Fed is ready to tighten policy based on the current strength of US economy, regardless of the uncertainty of Trump’s spending plans. What’s less clear is that the Fed is ready to signal a faster pace of rate hikes than in the last set of forecasts. The so-called dot plot will be the item to watch. The implied 3 rate hikes in the last dot plot could easily involve a hike in March and two more for the year. A so-called ‘dovish hike’ where the Fed lifts rates but is cautious on its forecasts could weigh on the dollar but may be just the goldilocks result needed to push stocks higher again.