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Low rates for longer is always a winner in financial markets. The Fed pointing to another year of interest rates at the current low levels satisfied investors who bought US shares and sold the US dollar in the wake of the meeting. The mood in Asia was a little more tempered with a mixed session. In Europe shares have opened higher after the Fed’s decision but gains are capped by uncertainty ahead of the ECB meeting and UK General Election.
What in effect Jerome Powell told investors during the meeting is you can have your cake and eat it. You’ll have the economic growth and we’ll keep interest rates low too. With the benefit of hindsight, this is what we’ve had for an entire decade and goes a long way to explain the ongoing stock market records in the US. As we enter a new decade, we know these conditions aren’t sustainable but still the era of interest rates at rock bottom and a slow growth recovery keeps going.
We haven’t seen record highs in Europe for some time because the economic growth hasn’t materialised despite negative interest rates. Einstein said the definition of insanity is doing the same thing over and over again and expecting different results. Today we’ll get the first glimpse of how insane the ECB will be with its new President Christine Lagarde. No policy measures are expected until the policy review which is expected to conclude early next year. All we can do is understand from President Lagarde’s tone which way she is leaning. She will want to walk the tightrope of offering some continuity from Draghi while also setting out her stall.
It’s UK election day and the base case scenario of somewhere between a 10-40 seat Conservative majority government is still odds on. The polls have tightened but bookmakers odds are still stacked heavily in favour of a Boris win. Sterling has meandered its way to an 8-month high vs the dollar. Currency strength has seen the FTSE 100 underperform other indices which are pricing in a de-escalation in the US-China trade war.
If the election gives the Conservatives a working majority in parliament and assuming global sentiment holds up, we’d expect the negative FTSE-GBP relationship to break down temporally. Meaning investors simultaneously price in a better economic outcome for the UK by buying Sterling while also loading up on the relative value to be found in UK listed shares
FTSE 100: The index is in the middle of its three-month old (7000-7400) price range, and quite simply we’d expect it to hit the upper limits of the range on a Conservative win and the lower limit on a Labour win.
DAX: Automakers and other big German exporters should lead the DAX on a breakout above 13,300 this week if new US tariffs are delayed.
S&P 500: Tech stocks and the big Dow industrials should benefit and take the S&P 500 into fresh record highs as soon as the tariff delay becomes official.
EURUSD: Hints at extra asset purchases by Lagarde could see the euro faded while an over-emphasis on fiscal policy could give the euro a bid.
GBPUSD: 1.33 has capped any rallies in cable for the best part of 18 months. We expect a slim majority gets us up to 1.33 but there is a risk it gets faded. A clear majority should see GBP fly through 1.33 and on track for an aggressive year-end target of 1.37. A hung parliament and we’re back down to 1.30 with further downside risk if Johnson is forced out of No.10. A minority Labour win and a likely coalition with the Scottish Nationalists and we could see a slump down to 1.25.
Crude oil: We still think there is pent up speculative demand from the OPEC decision that just needs the tariff delay to be unleashed and send WTI crude futures up through $60 per barrel.
Gold: $1480 per oz still needs to be exceeded and held for gold to make a more substantive push to the upside.