Financial market research and analysis

Markets gave a muted reaction to the Federal Reserve’s (Fed) decision to lower the main interest rates by 25 basis points to 1.75%-2.00% range.

Fed President Jerome Powell said that ‘moderate’ interventions should suffice to overcome the economic weakness caused by trade disruptions and a slower global growth. ‘More extensive sequences of cuts’ would be considered, if needed.

A clear hawkish shift from the Fed presidents bummed Donald Trump and investors out. Trump reacted immediately, twitting that the Fed has ‘no guts, no sense, no vision’.

Jerome Powell downplayed the recent repo crisis, but lowered the excess reserve rate to 1.8% to release the pressure on short-term borrowing costs, and said that the Fed could ‘resume organic growth of balance sheet’, hinting that asset purchases may be down the road to remove the need for further repo operations.

The Fed decision sparked no enthusiasm among equity investors. The S&P500 closed 0.03% higher, the Dow Jones (+0.13%) did just a bit better. Nasdaq erased 0.11%.

Asia traded on mixed sentiment. Hang Seng (-1.01%) slid, Shanghai’s Composite (-0.09%) remained quiet, while ASX 200 added 0.45% as communication stocks rallied 2.30%. Disappointing employment data fueled dovish rate expectations in Australia.

The Bank of Japan (BoJ) maintained rates unchanged, said it will review economy and prices at the next meeting. The yen strengthened to 107.80 against the US dollar and Japanese stocks gave back earlier gains.

US equity futures were offered in Asia.

FTSE futures (-0.26%) edged lower, hinting at a soft start in London.

The FTSE is expected to slip below the 7300p at the open.

WTI crude found support near the $58 a barrel, after the US oil inventories increased by 1.1 million barrels last week, versus 2.1 million decline expected by analysts. IEA director Fatih Birol said that there is enough oil on the market and that the US doesn’t need to tap into the emergency reserves as a result of the production disruption in Saudi Arabia.

Meanwhile, Saudi Arabia accused Iran for being responsible for the Aramco drone attacks, though indirectly. Donald Trump said that the US will respond with ‘some very significant sanctions’ within the next 48 hours. Escalating tensions between the US and Iran should keep oil prices sustained despite worries of building stockpiles and slowing global demand.


BoE to leave its policy unchanged despite softening inflation

The pound slid after the EU’s Juncker warned that a no-deal Brexit is now ‘palpable’. It is fair to say that anyone who discusses with Boris Johnson would turn pessimistic regarding a positive outcome in the utterly complicated Brexit procedure which demands significant compromises from both sides. Anyway, the UK Supreme Court will decide whether British MPs could return to parliament following a controversial suspension before the crucial October 31st deadline. As the UK outlawed to leave the EU without a deal on that date and given that the chances of a Brexit deal are almost non-existent by then, the UK will likely remain part of the EU clique for at least three more months.

Meanwhile, the inflation in Britain eased from 2.1% to 1.7% in August despite a significantly weaker pound during that month. The soft inflation read inhibited longer-term interest rate expectations and further weighed on the pound. The Bank of England (BoE) is expected to maintain its monetary policy unchanged at today’s meeting, as Governor Mark Carney will continue assuming an orderly Brexit while keeping an eye on the looming downside risks.

With the worst Brexit scenarios fully priced in, the pound traders could find interesting dip-buying opportunities below the 1.25 level against the US dollar. A negative outcome regarding Johnson’s parliament suspension could send the pound rallying past 1.25, the major 38.2% retracement on March – September decline, indicate a short-term bullish reversal with the possibility of a further rise toward 1.2670 (50% retrace) and 1.2738 (200-day moving average).


Helvetic rates to stay unchanged, as well

Swiss policymakers are also expected to stay pat at today’s monetary policy meeting, as the depreciation in the Swiss franc despite the ECB and the Fed rate cuts gained some time for the Swiss National Bank (SNB), who should think about what to do with the sight deposit rate which stands at an already disputed -0.75% level. Further lowering the Swiss rates may or may not discourage capital from pouring into the franc.

Smothered with too much love, the strong franc is a serious headache for Swiss exporters. Though luxury and high-priced Swiss products may temper a part of the franc’s strength, the deteriorating global economy inevitably weighs on Swiss businesses beyond its borders.

The Swiss GDP growth declined to 0.2% in the second quarter, versus 0.9% expected by analysts. The previous 1.7% read was revised significantly lower to 1.0%. Exports in July fell 1.8%, and the August release may not tell a better story given that the franc hit its highest levels on that month against the greenback since September 2018.

It is worth mentioning that the activity in the Euroswiss futures market hinted at the possibility of lower Swiss rates during August. Although the dovish SNB expectations dulled in September, they revealed that an increased number of investors have started wondering whether a 25-basis-point cut could be on the SNB’s agenda for the upcoming meetings.

With the franc giving back gains, more data points should help policymakers assessing if the downturn may have helped improving the fundamentals. But a thing is clear, a softer franc would do no harm to the Swiss economy. Hence, Helvetic policymakers will be faced with the reality of easing monetary conditions elsewhere, especially in the Eurozone, and could be brought to act sooner rather than later.