UK and Europe
Stocks in Europe were mostly positive on Wednesday, but remain trapped in tight trading ranges as investors await the result of the April meeting of the Federal Reserve.
Helped by data showing steady annual GDP growth, gains on the UK’s FTSE 100 were supported by well-received results from Barclays (LON:BARC) and GlaxoSmithKline (LON:GSK).
The UK benchmark was led higher by the oil and gas sector as oil prices made new 2016 highs. Financial shares were a drag, as Barclays gave up most of its early gains following its first-quarter earnings release and Standard Chartered (LON:STAN) suffered a broker downgrade.
Relief over resiliency in Barclays’ investment banking unit in a volatile quarter for financial markets was enough to buffer profits slumping 25%. CEO Jeff Staley was optimistic on the bank’s progress on selling its non-core assets and said a 15% rise in credit impairment charges related to the oil and gas sector remained “well-managed.” Barclay’s quarter was notable for the lack of provisions made for regulatory fines. If Barclay’s “clean” quarter is a sign of things to come, that’s a real positive for the bank’s shares and for the sector as a whole.
Shares of ARM Holdings (LON:ARM), a leading Apple (NASDAQ:AAPL) chip supplier were higher on relief that, despite having a first year-over-year decline, iPhone shipments were actually higher than expected. With shares down 10% in the last two weeks, there was an element of sell ARM on the rumour and buy the news on Apple’s weak quarter
US
The disappointing results from Apple and Twitter (NYSE:TWTR) overnight led to a 1.5% decline on the Nasdaq but broader indices were mostly unfazed with only moderate losses ahead of the Fed meeting.
Markets are predicting a 20% probability of a move on rates in June. That seems a long way out of sync with a lot of the recent rhetoric from a number of Fed policymakers. If the Fed wants to keep June open as possibility to match the rhetoric of FOMC members, then markets may be underestimating the risks of a hawkish surprise.
Global economic risks and tight financial conditions were the main forces behind a delay in hiking rates but since the March meeting the S&P500 has moved back to within touching distance of its all-time highs, the US dollar has weakened and commodity prices have recovered.
If the Fed is to signal June as an option, without a press conference, the tone of the statement will have to turn hawkish. More dissenters voting for a rate rise would give the meeting a hawkish bias but the FOMC board looks short of maverick hawks. The two dynamics within the statement for the Fed to shift are the domestic economic assessment and international concerns. It seems probable the Fed could tone down its domestic economic assessment given a slowdown in the data but also ease up on its concern about overseas and financial risks.
FX
FX markets were flat barring a huge loss for the Aussie dollar after Australian inflation saw a surprise contraction of -0.2 q/q against expectations of a rise of 0.3%.
The British pound was slightly lower for the day after data showed UK GDP growth slowed in the first quarter to 0.4% from 0.6% in line with forecasts. Cable dipped into the news release but regained its losses when the annual figure beat expectations by remaining at 2.1% y/y. Services remained the main driver of growth, rising 0.6% and showing no signs of ‘Brexit caution.’
Commodities
Oil prices gave back early gains, turning red after the EIA reported a bigger than expected build of 2.0M barrels in crude oil inventories. Earlier oil had reached the highest this year after the World Bank upgraded its 2016 oil price forecast to $41 attributing it to better sentiment and a weaker US dollar. Both Brent and WTI contracts remain up on the week.
Gold and silver prices were flat ahead of the FOMC but copper lost over 2% as a clampdown on Chinese futures exchanges dampened trading volumes.
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