Risk Assets higher on Fed Decision
In the wake of the FOMC decision, base and precious metals along with oil prices are all trading lower and the UK 2-Year yield has fallen below 0.6%. Despite all the talk that the focus would now be on the BOE to tighten policy, the market is clearly not expecting anything anytime soon.
All this adds up to a stronger open in risk assets with the mining sector lagging here in the UK. Goldman Sach’s call that iron ore will likely remain below $40 over the next three years is also weighing on sentiment. Fresnillo (L:FRES), Randgold Resources (L:RRS) and Glencore (L:GLEN) are all slightly lower on the day.
Berkeley Group Hldgs (L:BKGH) going ex-div today is lower by 3.49% and takes the bottom spot on the UK benchmark.
Healthcare, specifically pharma is the best performing sector owing to the Astrazeneca (L:AZN) deal. The company has bought a 55% stake in Acerta Pharma in a deal worth $4bn.
There does seem to be a bent towards the defensive this morning, with retailers J Sainsbury PLC (L:SBRY) up 4% on evidence that it may be reversing its revenue decline. The financial sector, particularly institutions with exposure to emerging markets and South Africa are also staging a bounce back. Old Mutual PLC (L:OML) is up 6.61% while Standard Chartered (L:STAN) has added 5.99%.
UK retail sales beat expectations by a wide margin rising 1.7% in November (inc. auto) against an expectation for a rise of 0.6%. The 3.9% rise year on year figure is even more impressive but his has done little to boost the pound which is now struggling to make any headway above $1.50 marker against the greenback.
Later this afternoon we’ll see the release of the Philly Fed Manufacturing Index and unemployment claims. Both will be watched but certainly will not possess the same importance that they might have done prior to last night’s Fed decision.
Following yesterday’s gain of 1.28% we are calling the Dow higher by 20 points to 17769.
Fed marked the end of zero rate era
The Fed raised the Federal fund rate by 25 basis points and set the RRP rate at 0.25%. ‘This action marks the end of an extraordinary seven year period’ said FOMC Chair Yellen. The decision was unanimous. The dot plot projection was kept unchanged for the next year, while the rate target for 2017 and 2018 were revised lower by 25bp and 12.5bp to 2.375% and 3.25% respectively.
The US dollar rallied across the board, with the AUD, NZD and NOK taking the biggest hit, with JPY and GBP saw limited losses. The equity markets are painted in green.
The yield spread between the US and German 2-year bonds is widening with the anticipation of a follow-up in rate tightening, increasing the selling pressure in the euro versus the dollar.
The 10-Year spread is less impacted, due to the dovish view on 2017/2018 as regards to Fed dot projections. The Fed could possibly proceed with additional four rate hikes through 2016, if the domestic and global macroeconomic conditions permit. In this context, the inflation will be a key indicator and downside risks prevail with lower energy and commodity prices and a stronger dollar.
The euro took a reasonable hit to 1.0832 against the US dollar as the Fed rate hike was mostly factored in. It is now time to rectify the post-ECB rally in the euro. Nevertheless, the market is still significantly short in the euro. Therefore the downside potential could well remain limited. Once the short book eases to reasonable levels, the fundamental shorts will creep in with a mid-term target unchanged at 1.05/1.0450.
Technically speaking, the slide below the Fibonacci support of 1.0855 (major 38.2% on post-Draghi rise) turned the short-term sentiment neutral from positive. There is still potential for a recovery back to 200/100-day moving average zone (1.1037/1.1058). A move above 1.1080/1.1120 (Fib 50% on Aug-Dec slide) could open the gate for an advance to the mid-term critical technical resistance of 1.1260 (major Fib 61.8%). Below this level, the divergence between the Fed and the ECB is still factored in.