Europe
Central banks have played havoc with the FTSE 100 today. First, it was the Federal Reserve last night, as their interest rate hike and hawkish commentary prompted a sell-off at the London open.
The second blow to the FTSE 100 was from the Bank of England (BoE), as its members voted five to three to keep interest rates on hold. The fact that three members voted to hike rates was enough to put further pressure on the London equity benchmark. The market was caught off guard by the voting breakdown, as the disappointing UK earnings figures yesterday led traders to believe that the BoE would be dovish today.
Persimmon (LON:PSN) opened lower as it went ex-dividend today, but the revelation that interest rates could be rising sooner than expected from the Bank of England (BoE) pushed the share price further into the red. The homebuilder and its peers have benefitted greatly from the loose monetary policy of the BoE, and the suggestion that rates could be rising hit the sector hard. Barratt Developments (LON:BDEV), Bovis Homes (LON:BVS), Redrow (LON:RDW) and Taylor Wimpey (LON:TW) are also offside today.
US
US stocks have been hit by the Feds hawkish update last night. The announcement that interest rates were to be raised was one thing, but the announcement that the balance sheet of the Fed would start to be reduced this year, along with the revision lower to the inflation forecast was another thing. Traders were too hopeful that the US central bank would be dovish in their outlook, and now they are quickly banking their profits. The record highs that were seen in the Dow Jones, S&P 500 and Nasdaq 100 recently were partially created by an assumption that the US central bank would be worried about slipping inflation, and therefore need to keep their monetary policy on the loose side.
The note that Goldman Sachs (NYSE:GS) wrote about the heavy weights of the tech sector is still ringing true as Alphabet (NASDAQ:GOOGL), Netflix (NASDAQ:NFLX), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) are all in negative territory. The decline in those stocks started at the end of last week, and the Fed’s update has accelerated it.
FX
The GBP/USD started out in decline this morning as the update from the US central bank last night was still in traders’ minds. The fall in UK retail sales in May only added to sterling’s woes, but the shock that three members of the Bank of England (BoE) voted to increase interest rates jolted the pound higher. Kirstin Forbes was known to be in favour of hiking rates, but it surprised traders that Michael Saunders and Ian McCafferty joined her today. As it stands, five members voted to keep rates on hold, but today’s vote shows the gap is narrowing.
The EUR/USD is being driven lower by the strength of the greenback. The single currency has been losing ground to the US dollar since the Federal Reserve meeting last night. Throughout 2017, the EUR/USD has been on the rise, but traders were quick to exit their long positions when the Fed reduced their CPI forecast, and announced that the balance sheet reduction would start this year. The hawkish announcement by the Fed caught dealers by surprise, and the euro is being hit hard by it.
Commodities
Gold has been hit by the hawkish Federal Reserve announcement. The interest rate hike came as no surprise, but traders were not expecting the Fed Chair Janet Yellen to lower the inflation forecast and increase the growth outlook. By doing this, Ms Yellen, is basically saying the weak inflation that the US is experiencing is not going to hold them back from further monetary policy tightening. The Fed will start to unwind its balance sheet this year, and this added to the hawkish stance of the announcement. Going into the meeting, dealers were hoping for ‘dovish hike’, they got their hike, but there was nothing dovish about it.
Brent Crude and WTI are lower today as concerns about over-supply persist. Traders have their doubts that some OPEC members will stick to the production cut agreement. Adding to that, the Intentional Energy Agency (IEA) anticipates that shale production will rise also. Oil has been falling since the OPEC meeting in late May, and the downward trend is not showing any signs of changing.
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