Financial market research and analysis

Equities extended rally as the Federal Reserve (Fed) delivered a sufficiently dovish accompanying statement not only to meet the market’s expectation, but also to surprise to some extent. The Fed maintained its benchmark rate unchanged at 2.25%-2.50%, kept its growth outlook stable at 2.1%, but pulled the inflation expectation for this year down to 1.5% from 1.8% previously. Chair Jerome Powell said that the Fed is ready to lower the interest rates to boost growth and to support inflation.

The probability of a July rate hike jumped to 100%. Some investors pushed their expectations even further, charting a 50-basis-point cut as soon as next month. The activity in the US sovereign market suggests 22% chances for a 50bp cut to happen in July.

The US 10-year yield slipped below the 2% mark, the US dollar weakened across the board, pushing spot gold prices to the highest levels since 2013.

Of course, the economic data will give a better hint on the necessity for larger rate cuts in the US, but the current expectations seem to have gone too aggressive. At this stage, it is important to remember that the US economy did just fine in the first quarter. Due next week, the US first quarter GDP growth could even be revised up to 3.2% from 3.1% printed a month earlier and the preliminary PMI figures could show a slight expansion in the activity in June. Hence, any positive data will suggest that a reasonable readjustment in rates should be enough to maintain the US growth at satisfactory levels and lead to an upside correction in the US sovereign yields and the US dollar.

This morning, the dovish Fed waves hit the Australian and New Zealand coasts. The Aussie and Kiwi 10-year yields eased to fresh record lows.

The USDJPY slipped below the 108.00 mark, as the EURUSD recovered to 1.1273.

The pound sterling has been among the biggest winners against the greenback. Cable advanced to 1.2689.


BoJ and BoE to give verdict

Today, it is the Bank of Japan (BoJ) and the Bank of England’s (BoE) turn to announce their policy decisions. With the yen hitting the strongest levels against the US dollar this year, the BoJ is expected to soften its tone as well. The BoJ announced to leave its rates unchanged, but little dovishness came from Tokyo in the morning hours. The BoJ doves lie in wait.

In the UK however, there is no clear consensus about what the BoE should do next. Both the hawkish and the dovish camps have valuable reasons to think that the UK rates should move up or down respectively. The hawks believe that the softer pound should continue pushing the consumer prices above the bank’s 2% target and that the BoE should tighten its policy to maintain the price stability. The doves, on the other hand, believe that the actual dovish shift across the G7 central banks combined with the Brexit uncertainties require an accommodative monetary policy for a longer period.

Speaking of Brexit, Boris Johnson won 143 of 313 votes in the third round of Conservatives’ ballot. Nearly half of Tory MPs share Johnson’s ambition to leave the bloc with or without a deal.

Though the BoE cannot be held hostage by the Brexit uncertainty, it still must factor in the risks that come along with the possibility of an unsatisfactory outcome. The UK’s yield curve flattened over the past month, although a rate action seems highly unlikely until mid-2020. However, we have seen that the central bank expectations tend to change quickly nowadays. The 10-year gilt yield fell to the lowest levels in three years.

Also, due today, the data could confirm a 0.5% m-o-m contraction in UK retail sales including auto fuel, compared with 0.0% printed a month earlier.


FTSE to gain at the open

The FTSE futures (+0.39%) hint at a positive start in London. The FTSE 100 is expected to open 24 points higher at 7427p.

The dovish Fed trades will likely pull the UK stocks higher despite a stronger pound, but the sentiment in energy and mining stocks could remain dull.

Energy stocks were broadly offered in Asia despite improved oil prices. Brent crude ticks higher on the back of a softer US dollar. Meanwhile, OPEC and its allies agreed to meet on July 1 and 2 to discuss further production cuts to adjust their supply to the weakening global demand.


Slack begins trading in NYSE

Slack Technologies will start trading in New York Stock Exchange today. The company is expected to get a market valuation of $17 billion through a direct listing, meaning that the shareholders will be selling their shares directly to the public with a reference price set to $26 per share, in line with the valuation on the private markets. This does not mean that the Slack shares will open at this price. In fact, they could open significantly above or below this level. As a reference, Spotify, which opted for a direct listing in 2018, began trading at $165.90 versus a reference price set at $132. Spotify shares were exchanged at $149.50 on Wednesday.

A direct listing is clearly a riskier option to go public, given that the supply could exceed demand, resulting in an undesired downside volatility in the early days of trading. But the timing seems to be right for a tech stock to go public. Given the solid risk appetite across the technology stocks, Slack could hope for a solid debut in New York.