Capital markets are unusually keyed into Fed decisions so investors should be expecting pockets of volatility to be somewhat plentiful ahead of next week’s FOMC rate announcement (Sept 20-21).
But, that is next week, now, the market has a few other central bank decisions to prepare for and react to - the BoE and BoJ being the most important.
(Note: Overnight, the Swiss National Bank (SNB) delivered what was expected, keeping rates on hold at -0.75% and said it would intervene in currency markets as needed).
This morning, the Bank of England (BoE) is not expected to change policy, but Governor Carney could signal further easing in months to come. This would not be a good news story for the already under pressure pound (£1.3207).
Stateside, the forecasts for a Fed rate hike will be mightily influenced by this morning’s August figures for U.S industrial output, producer prices and retail sales.
1. Equities relief rally or what?
All asset classes, in particular stocks and bonds, have whipsawed in recent sessions in response to growing unease over the direction of future rates and stimulus.
So its somewhat a relief that Asian stocks were treading water overnight, as traders pulled back positions ahead of a long weekend and with key monetary decisions in Japan and the U.S. due next week. A stronger yen (briefly traded under ¥102.00 in the session) pressured Japanese stocks.
Japan’s Nikkei Stock Average slid -1.4%, taking its week-to-date loss to -3.5%. Australia’s S&P/ASX 200 edged -0.2% lower but Hong Kong’s Hang Seng Index rose +0.6%. Elsewhere, South Korea, China and Taiwan were closed for a public holiday.
In Europe, the Stoxx Europe 600 has inched up +0.1% in early trade following five consecutive sessions of declines. Bank stocks are leading the way while the energy sector continues to underperform. The FTSE 100 is looking for direction from the Bank of England (BoE) rate announcement while futures point to a +0.2% opening gain for the S&P 500.
Indices: Stoxx50 -0.1% at 2,967, FTSE +0.2% at 6,685, DAX +0.1% at 10,386, CAC-40 -0.1% at 4,367, IBEX-35 +0.2% at 8,722, FTSE MIB -0.2% at 16,500, SMI -0.1% at 8,155, S&P 500 Futures +0.2%
2. Commodities mixed performance
Black gold or crude oil has found some stamina in early trading, following a two-day slide of almost -6% which was mostly provoked by the market getting a little more conservative about when the balance between supply and demand would return.
Brent crude is up +0.6% to +$46.11 a barrel after dropping -2.6% yesterday when the EIA report revealed large weekly builds in petroleum products offset a surprise draw in crude stockpiles. Light crude or WTI is up +0.46% to +$43.76 a barrel.
Expect gains to be somewhat capped as Libya and Nigeria both come back on line to add hundreds of thousands of barrels to world markets within weeks.
Gold prices are trading lower mostly on the back of a steady dollar and equity in the black.
Spot gold prices are down -0.19% at $1,323.30 an ounce. The yellow metals prices have been largely influenced by the “big” dollar moves and comments from Fed officials in recent weeks. Investors can expect trading to remain somewhat subdued until next weeks Fed rate decision.
3. Global yields stay close to home
For most of this week, both corporate and sovereign yield curves have been trading like a “hot” commodity on the back of central bank rhetoric. Whether it was BoJ or Fed members, dealers seem to be somewhat satisfied with how they have shaped their yield curves ahead of next weeks BoJ and Fed’s rate announcements. However, that may all change after the BoE announcement this morning as the markets concern is that the central bank support is going to be different going forward.
U.S 10-year treasury’s have backed up +1bps to +1.71%, after falling -3bps in yesterdays session. German bunds have increased +2bps to +0.04%. U.K 10-year gilts are little changed ahead of BoE rate announcement, trading at +0.92%.
Elsewhere, Aussie 10-year notes declined for a sixth day, pushing their yield to this quarter’s high of +2.11% on the back of the country’s jobless rate unexpectedly falling to new three-year low of +5.6% last month. It seems that dealers down-under are pricing out any further cuts by the RBA this year.
4. Big Dollar steady
Early morning focus is on the pound (£1.3207) ahead of the BoE meeting.
Investors expect sterling to come under renewed pressure if Governor Carney suggests that he may cut interest rates further in coming months. However, recent solid U.K. data has seen expectations for a -15bps rate cut in November drop to around +20%.
The USD will be focusing on a deluge of data at 08:30am EDT (U.S industrial output, producer prices and the biggie – U.S retail sales).
Retail sales have been somewhat soft this year and many expect the August print to be no different (forecast -0.1%, ex- auto to have risen +0.2%). A headline print close to expectations should not be enough to change next weeks expectations on a rate move, but an upside surprise could support the dollar (¥102.42, €1.1239, A$0.7475).
5. Whatever happened to the post Brexit Blues?
Data this morning reveals that the U.K economy remains resilient.
U.K retail sales for August (-0.2% vs. -0.5% e) not only beat expectations, but also trumped July’s print, confounding fears of a sharp slowdown after June’s Brexit vote.
The headline print indicated that the consumer have continued to spend despite the country’s surprise decision to exit the EU. Sales were +6.2% higher than a year earlier.