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Cautious session as market waits on the Fed

It’s been a cautious session for markets in Europe today with little in the way of direction ahead of tonight’s Federal Reserve rate decision, and tomorrow’s Bank of England and ECB rate decisions.

Europe

The FTSE100 is outperforming helped by another strong session from AstraZeneca as it continues to build on the gains, we saw yesterday in response to its acquisition of Icosavax.

Online betting company Entainshares are higher on the announcement that its CEO Jette Nygaard-Andersen is stepping down with immediate effect in the wake of the recent settlement with HMRC over alleged bribery allegations at its Turkish subsidiary. 

Weakness in oil prices which slid to fresh 5-month lows before rebounding, is weighing on the share prices of BP and Shell.

B&M European Retail shares have dropped after the retailer announced a share placing at a discount to its closing price yesterday, raising a total of £162.1m. 

US

US markets opened unchanged after US PPI came in slightly below expectations at an annualised 0.9%. Core prices also slowed more than expected, falling to 2% and the lowest levels since early 2021 ahead of today’s Fed meeting as investors continued to price in aggressive rate cuts for 2024. 

Having reported a Q3 loss back in October as well as reaffirming lower guidance Pfizershares have struggled for gains in the weeks since then, undermined by further setbacks abandoning its weight loss pill earlier this month due to side effects which adversely affected half of the people who took it. Today the bad news continued after the pharmaceutical giant issued guidance for 2024 which fell short of expectations, sending the shares to their lowest levels in over 10 years. The company said it expects full year revenue of $58.5bn to $61.5bn, with only $8bn of that coming from its Covid stable. Full year profits expected to come in between $2.05 to $2.25 a share.

Teslashares have come under pressure after ordering a recall of 2m vehicles due to an autopilot issue, identified by the US regulator which determined that the system doesn’t do enough to prevent misuse.

Walgreens Boots-Alliance is in focus on reports that it might look at pitching an IPO of its UK Boots operation, signalling a return to the UK market 11 years after it was acquired by private equity back in 2007. Walgreens has been mulling options for what to do with its UK operation for the last 2 years and has been struggling with losses due to litigation claims in its US market related to opioids. 

FX

The main focus today has been on what Fed chair Jay Powell is likely to say when it comes the central banks outlook on the US economy as well as how many rate cuts it anticipates making through 2024. The last set of dots showed the Fed projecting a Fed funds rate of 5.1% by the end of next year. Given that the current fed fund rate mid-point is only 25bps above that they will have to move the dots for next year, with the main question being around by how much. Markets are pricing in over 100bps for next year, which the Fed will likely want to push back on given how much financial conditions have loosened in the past few weeks. Today’s PPI numbers have pointed to what looks like a benign inflation outlook, in essence justifying market pricing for next year so the challenge for Powell will be in closing the gap between market pricing and what the Fed wants to see.

The pound has slipped back after economic activity contracted more than expected in October, by -0.3%, more than reversing the 0.2% expansion in September. While disappointing, these monthly numbers tend to be quite volatile with the rolling 3-month number showing economic stagnation of 0%, helping to push gilt yields even lower across the board.

While the Bank of England is unlikely to allow such a volatile series to influence its policy decision tomorrow, this week’s data may temper the reaction function of the more hawkish members of the MPC and perhaps persuade them that financial conditions are tight enough already. While this would make sense markets are already pricing in the prospect of sharp rate cuts from the BOE next year. Yields this week have fallen 20bps in the last 2 days signalling the idea that the market believes the BoE will look past high inflation and start cutting to help the economy if growth continues to disappoint. This will present a challenge for the central bank tomorrow in its messaging tomorrow.  

Commodities

Crude oil prices have rebounded from close to 6-month lows today, helped by a slightly weaker US dollar after today’s softer than expected PPI numbers, and a bigger than expected weekly draw of 4.26m barrels. With US supply output already at record levels and concerns over demand continuing to rise after this week’s weak economic numbers from China and Europe, there is a worry amongst OPEC+ that further production cuts on their part could merely shift market share towards US producers.

Gold continues to languish near to its recent lows with holding above support at the 50-day and 200-day SMA, with today’s softness in yields providing little in the way of uplift. The market appears to be positioning cautiously in the event Powell adopts a hawkish bias in pushing back at the market consensus of aggressive rate cuts in 2024.

Volatility

Tech play Oracle saw elevated levels of price action on Tuesday in the wake of a Q2 earnings release. Revenues, whilst higher than the comparative from a year ago, came in below expectations and this took a heavy toll. The stock closed lower by more than 12%, with one day vol printing 69.17% against 31.5% for the month.

The ongoing themes of a mild winter being forecast for North America plus high production levels saw US Nat Gas prices continue their move lower on Tuesday, testing levels not seen since the summer as a result. One day vol on the contract stood at 56.22% against 51.66% for the month.

Yesterday’s lower than expected wage growth data from the UK put Sterling under a degree of pressure, elevating price action as a result. One day vol on EUR/GBP came in at 5.84% against 5.1% on the month, whilst Cable also saw increased interest printing 8.37% on the day and 7.83% on the month.

Sugar prices were in focus after the market appeared to find a floor at least for now at 21.50 cents per pound. Having traded above 28 cents per pound a little over a month ago, the decline here has been remarkable although prices remain well above levels seen over the last few years. One day vol printed 85.79% against 49.22% for the month.

 


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