Greece may still be lurking in the headlines, but today is about the FOMC. With little chance of any hike at this week’s meeting, the focus will be on the press conference and the dot plot of the Fed rate expectations. Market participants may not be all-out bullish but any delay to monetary tightening could help to underpin equity indices later today. It will be a big surprise if Yellen makes a move today.
While we saw no change to the MPC voting split this morning, the BOE headlines seem broadly upbeat and sent the pound to a 4 week high against the dollar. While fiscal consolidation is likely to weigh on growth and downside risks from a potential ‘Grexit’ are considered significant, wage growth appears to be on the right track and unemployment remains stable.
Most notably, the central bank stated that its policy path would not be set by other central banks. Markets are now pricing in a 63% probability of a rate hike within the next 3 months. It may well turn into a race to normalisation with the Fed.
The FTSE 100 continues to satellite the 6700 metric and there is definitely a more risk based attitude today with defensives falling out of favour and financials on the front foot for a change. Some corporate updates are keeping the support level in place.
Credit Suisse has initiated downgrades on all the major UK supermarkets; WM Morrison Supermarkets PLC (LONDON:MRW), J Sainsbury (OTC:JSAIY) PLC (LONDON:SBRY) and Tesco (LONDON:TSCO) have all fallen back in early trade.
It’s been an excellent year for the online gambling company, what with the World Cup last year and record betting volumes at Cheltenham and the Grand National. Shares in Betfair Group Plc (LONDON:BETF) have risen a fairly hefty 45% year to date so it’s not unexpected that we are seeing a degree of profit taking in early trade. The need to exit from some countries where online gambling regulation is uncertain may well be negated by the company’s exposure to the US. Operating profit for the year ended April 30 came in at £94.3m up 53% from last year and full year sales also rose 21% . The outlook looks promising with active customer numbers up 52% to 1.7m and in spite of the introduction of UK consumption tax Berkeley, the London focussed house builder has delivered better-than-expected full-year profits, rising 42% to £540m. Guidance is upbeat with comments that market conditions are normal and that demand remains strong. The chairman has more than intimated that he believes the UK should remain in the EU. Other house builders have gained in sympathy with Berkeley's market-beating profits, with Persimmon (LONDON:PSN) and Barratt Developments (LONDON:BDEV) also garnering investor interest.
We expect the Dow to open higher by 70 points.
Franc gains in the wake of SNB meeting
Aggressive franc purchases sent the US dollar to 0.9235 versus the Swiss franc, euro legged down to 1.0436 for the first time in two weeks. Euroswiss futures gapped above 100.90 on expectation that the Swiss National Bank will reiterate its forward guidance.
The SNB’s captivity in negative rate territories will last until a significant improvement is seen in Eurozone’s economic outlook. Inopportunely, Switzerland does not suffer the franc’s strength alone, it also suffers from being on a different planet regarding its wage and cost structure. The excess liquidity and negative rates offer no immediate solution to the comparatively high level of business costs in Switzerland and fears of a negative rate viral spill-over to savings and pensions is all but encouraging for spending. The entire price structure should shift to bring Swiss prices to levels more digestible on the international platform. And there is nothing the SNB can do about it.
The euro-swiss cap has been a costly endeavour. The compulsive and sharp upside moves in franc signal that the appetite in Swiss franc is not fully under control. The cost for the society is a concern that occupies politicians’ agendas however. The SNB, in dearth of popularity, still needs to have its finger on the pulse.
The good news is that the high margin Swiss companies have great ability to temper shocks and adapt to changes. Following Shore’s takeover approach to Actelion Ltd (SIX:ATLN), Swiss names as Roche GS (SIX:ROG) and Bayer AG (XETRA:BAYGN) NA (SIX:BAYGnEUR) are also expected to enter the competition. There is no gain in letting niche players fly away, and the cost is certainly worth paying.
Fed is the sole hope
The Fed will give verdict today, following its two day policy meeting. We expect the FOMC to maintain status quo and do not expect the first rate hike to happen any time before September. On to sovereign bond markets, the Fed is given 60% chance to proceed with the first rate hike by December. If the strengthening in US dollar could do any good to Swiss franc, the battle on the euro font will certainly be easier to hold.