Financial market research and analysis

The latest inflation report showed that UK headline inflation accelerated at the firm pace of 1.2% year-on-year in November, versus 1.1% expected and 0.9% printed a month ago. Core inflation rose by 1.4% year-on-year, versus 1.3% expected and 1.2% printed previously. The rising import prices, due to a weaker pound and the rebound in oil prices, were the major drivers in the acceleration of consumer prices in November. The pound gained against the US dollar and the euro. 

Global risk-on sentiment helped the FTSE 100 reverse earlier losses, yet the faster than expected inflation report dented the appetite. 

UK mining stocks traded south on the back of softer commodity prices, as even a solid Chinese industrial data couldn’t revive the appetite in basic materials at today’s session. 

Appetite in energy stocks also turned sour as the oil rally lost steam.

Fed to raise interest rates

Appetite in the US dollar is mixed moving into the two-day FOMC meeting. The Federal Reserve (Fed) is expected to announce a 25 basis points increase in the Fed funds rate by tomorrow. This interest rate move began to be priced into the markets immediately after Donald Trump’s US presidential victory.

According to the latest CFTC data, USD net long non-commercial combined positions hit the highest level since August 2015.

Inflation expectations in the US have roofed amid President-elect Trump announcing his plans to spend $500 billion in infrastructure and bring jobs back to America. The US sovereign yield curve shifted significantly higher; the US 10-year yields surged from below 1.80% in Nov 9^th to 2.50%. 

Of course, the Fed is not expected to overheat the US and the global markets with a hawkish statement. The FOMC statement will likely remain fairly balanced. FOMC Chair Janet Yellen will certainly drive the attention back to what matters most: the economic data. Indeed, it is important to observe how fast the rising inflation expectations will translate into the actual data. And also, by how much the appreciation in the US dollar could temper the anticipated rise in inflation and inflation expectations.

As a result, the possibility of disappointment in the Fed hawks’ camp vis-à-vis the Fed’s accompanying statement represents a decent downside risk for the US dollar and US yields. If the Fed sounds too cautious, or less hawkish than expected regarding the future of the US’ monetary policy, the corrective sell-off in the US dollar and the US sovereigns could be strident.

US stocks to open higher

The Dow Jones and the S&P 500 stocks didn’t hit new record highs for the first time in four trading sessions. Yesterday, energy stocks (+1.16%) outperformed the Dow Jones index on the back of a renewed oil rally. Financials ended the day 0.92% lower.

The Dow futures remained flat in Asia, yet picked up some positive momentum as European traders stepped in.

Currently, stock traders appear to be betting on a dovish Fed. As mentioned above, the FOMC will certainly attempt to temper the Fed-hawks at this week’s meeting, given that they have massively taken over the market since Donald Trump’s presidential victory. In this context, the Dow could attract fresh buyers, even if the index is trading at record high levels.

After having experienced an unprecedented rally in the US stock markets and given the rising positive momentum in the US futures markets, we cannot rule out the possibility of a renewed record attempt in the US stock markets heading into the FOMC meeting.

The S&P 500 is expected to be 4 points higher at 2260, as the Dow Jones is seen 37 points higher at 19833 at the US open.

The AUDUSD treaded water. The rise in iron ore prices and improved risk appetite bolstered buyers, while the rising US yields kept carry traders on the sidelines. The US 10-year yield curve surged to 2.49%.