Asia markets finished the day on the back foot this morning as Japan’s largest ever IPO SoftBank underwent a similarly soft debut on its first day of trading on the Tokyo stock exchange.
Whether that would have been the case in a more benign market environment is open to question, nonetheless investors have continued to remain cautious ahead of today’s much anticipated Federal Reserve rate decision.
Markets in Europe have had a similarly tepid, if somewhat positive start as investors look to the US central bank and how it intends to navigate the choppy waters of today’s contentious decision to potentially raise rates for the fourth time this year.
In what has become the new normal, US president Donald Trump has stepped up his criticism of the Federal Reserve variously calling its decisions “loco” and “crazy” over the past few months. Yesterday he weighed in again asking it to stop the $50bn monthly reduction in its balance sheet as well as calling for a pause in rates, arguing that rates are already too high. Since last December the Fed has raised rates 4 times and reduced the size of its balance sheet by nearly $500bn.
Whether the Fed will listen is another matter, but President Tump isn’t the only one who is uneasy at the Fed’s penchant for pushing rates higher, with a number of high profile interventions urging the Fed to be much more cautious, particularly when it comes to its forward guidance.
For now markets are still assuming that the Fed will raise rates today, simply because to pause now would send an even worse message that the Fed is a lot more concerned than it was when it met at the beginning of November, when economic conditions weren’t that much different to what they are now.
If anything Trump’s criticism could prompt the Fed to assert its independence by being too hawkish when in reality it needs to dial down its guidance against a backdrop of inflation that is cratering and a bond market that is flashing warning signs of a possible upcoming recession.
If the Fed gets its message wrong we could well start to see market talk of a rate cut towards the end of next year, rather than talking about a rate rise.
The rise in gold prices in the last few weeks has reflected the increased risk aversion in global markets rising to a five month high yesterday, and pushing against its 200 day MA for the first time since June this year.
The pound is holding steady despite ongoing political gridlock at Westminster and ahead of today’s inflation numbers and tomorrows Bank of England rate meeting.
Despite the difficult retail environment the sharp fall in oil prices is likely to offer a welcome respite to UK consumers and be reflected in today’s CPI numbers, which are expected to come in at their lowest levels this year at 2.3%. With wages at a ten year high of 3.3% the pressure on wallets is set to ease further as we head into 2019, however it is likely to be short-lived as travel fares will rise in January.
Oil prices have slid over 30% since October, when markets were speculating on when we might hit $100 a barrel, and yesterday closed 7% lower and a 14 month low, as concerns about oversupply and lower demand weighed on prices.
Shares in the bookmakers have had a mixed open as the introduction of the £2 fixed odds betting limit is introduced with GVC pushing higher however Paddy Power shares are slightly softer.
In company news GlaxoSmithKline is top of the pile after reaching an agreement with Pfizer to combine their health care businesses into a new joint venture as both companies look to bolster their position in the market place. The pharmaceutical sector is likely to face enormous challenges in the years ahead with respect to margin compression and the prospect of increased competition, and this move appears to go some way to addressing these challenges further, particularly since companies like Amazon have helped push prices lower.
Glaxo will obtain a 68% controlling stake in this deal with Pfizer the remaining 32%, which will give the business combined sales of $12.7bn. The tie up is expected to introduce cost savings of $750m by 2022, while planned divestments of $1.3bn would be expected to cover the costs of the integration.
This announcement seems to be the next brick in the wall of CEO Emma Walmsley’s plan to cement Glaxo’s position in this particular space, having already bought out Novartis stake in a similar venture earlier this year, while also offloading its Horlicks business. The company also outlined future plans to separate the joint venture into a demerger and list the consumer healthcare business on the UK equity market.
The company will then operate separately from the pharmaceuticals and vaccines business.
This long term plan may also have something to do with the announcement earlier this year that Amazon’s Jeff Bezos, JP Morgan’s Jamie Dimon and Warren Buffet were looking to combine resources to build a health care company that would seek to drive down costs and improve affordability for ordinary consumers.
On the downside Royal Mail Group shares have slipped to new record lows on the back of FedEx’s poor numbers last night after the close in the US.
FedEx latest numbers didn’t paint a particularly happy picture after the company downgraded the bottom end of its earnings guidance for 2019, by $1.70c to a range of $15.50 to $16.60c. Management also announced a raft of further cost savings measures including reducing hiring and reducing discretionary spending due to slowing global trade. Europe was a particular weak spot and the weak outlook saw UPS shares also come under pressure in aftermarket trading.
US markets are expected to open higher ahead of today's Fed decision.
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Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.