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UK Labour Data Beats Expectations

Published 09/16/2015, 06:36 AM
Updated 04/25/2018, 04:10 AM

A late day surge in US equities and a selloff in US bonds overnight has had a contagious effect on the broader equity market this morning. Asian markets are also looking healthier with a massive rally in Shanghai for reasons known only to the buyers themselves.

The most anticipated event of the financial calendar year is upon us. The two day FOMC meeting should finally give us some clarity and ease the debate on tighter monetary policy for at least five or ten minutes until market participants look to the next potential decision.

European indices are emitting a fairly positive glow ahead of the decision with the FTSE adding 0.75% despite the drag from the basic materials sector. Consumer staples once again are leading the sector gainers with SAB Miller stock up 3% as takeover rumours underpin.

Glencore (LONDON:GLEN) had at one stage been the top riser on the FTSE but has since pared back some of the initial enthusiasm. The beleaguered mining company has sold $2.5bn in stock in a bid to further reduce its debt load and protect its credit rating. Selling it at 125p per share – the company is responding to investor concern that even with the wider debt reduction plan, withstanding the commodity clump will be difficult.

Burberry Group PLC (LONDON:BRBY) is also a high riser on news that it had introduced a channel on Apple Inc (NASDAQ:AAPL).’s music service. The luxury goods maker is attempting to widen its influence and reinforce its cool image and seems to have shrugged off the poor image many of older folk us remember from a decade ago.

TUI (+2%) is one of the top 10 risers today after being removed from the JP Morgan analyst focus list. Deutsche Bank (XETRA:DBKGn) has a target price of 1385p on the stock far above the average broker 12 month target of 1287p

This week has mostly been about inflation and the lack thereof. Eurozone inflation remains under the weather and has thus inspired calls for additional QE from the European Central Bank. US inflation is hardly lighting up the skies and is expected to print a 0% number later this afternoon. The divergences in the possible necessity further loosening against the need for normalisation will no doubt be the source of a great deal of volatility no matter what the FOMC decides to do this week.

Official figures released this morning on the UK labour market arrived slightly better than expected with the jobless rate falling to 5.5% in the quarter to July. Jobless claims were also in line remaining unchanged at 2.3%.

Tuesday’s inflation number release was lower than expected and BOE policymakers at the last meeting judged annual unit wage cost of 1% in Q2 to be some way short of what was needed to reach the 2% CPI target, today’s average earnings data a leading indicator of inflation came in higher than expected at 2.9% and may well change the minds of some of the more fervent doves in the MPC.

The pound has pushed that little bit higher against the greenback and currently trades at 1.5384 but with the overcrowded longs in the dollar keeping any major surge in sterling at bay.

US inflation due later will have little effect unless we see a significant gap between the actual and the expectation. The hawkish view is that it will take a few years to return to ‘normal’ levels and there is a need for the Fed to be pro-active rather than reactive.

We are calling the Dow flat at 16600.

The Swiss National Bank Remains Captive

The Swiss National Bank sits still in captivity in its shiny golden cage.

The SNB gathers tomorrow and is expected to keep its monetary policy unchanged. Less of a choice, more of despair. Given the safe-haven particularity of the Swiss franc, the SNB has had and continues to have a hard time adopting its strategy to offset that of other central banks. In the current environment of hostile monetary policy rattles, it has cost both time and money to push back the capital flows from pumping up the value of the franc. Nowadays, the Swiss franc apparently listens to the SNB or perhaps lacks any real trading participants owing the disastrous move back in January. Euro hovers around the 1.10 – still considered as the SNB’s implicit upper band, while the US dollar is considered at acceptable levels above the 200-day moving average mark, now at 0.9542.

In the interest rate futures market, the activity is dull with prices set accordingly to the SNB’s negative 75 basis point sight deposit rate. Still tense, the Swiss market needs to take a breather. At this time of the year, the use of euro as a funding currency has clearly taken the pressure of the SNB’s shoulders. Unfortunately however, the European Central Bank has started to give away a set of light rumours on a potential expansion of their QE. If the European Central Bank decides to fight back the euro rebound, the Swiss National Bank is little equipped as the SNB walks on a rusty rope: negative interest rates are politically ostracized while the central bank’s balance sheet keeps on inflating in value and in risk. The SNB losses weigh on the overall government budget.

Swatch: Seize the opportunity.

Swatch Group (SIX:UHR) CEO Hayek lately urged the SNB Board to resign as the pessimism among Swiss watchmakers rose. In addition to Chinese slowdown, the diagonal competition from the smart watches and the easy convertibility of Chinese customers to new, high-tech products keep the pressure heavy on Swiss watch industry.

The aggressive sell-off in global equities dragged the Swatch Group shares down to 360fr – well below the company’s fair value. The potential of recovery could be seized with a price target of 450fr/share.

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