UK and Europe
European stocks were firmly lower on Thursday after Federal Reserve minutes revealed most members thought it could be appropriate to raise US interest rates in June. The Fed has done its bit for investors who chose to sell in May and stay away.
Stocks extended losses and the US dollar strengthened in the afternoon when the Fed’s Jeffrey Lacker backed up the minutes with more hawkish rhetoric. Mr Lacker, who isn’t a voting member said Brexit should not in itself prevent a rate hike in June and said he’d be comfortable with as many as four rate rises this year.
Travel and leisure stocks were the biggest drag on the FTSE 100 on news of the EgyptAir plane going missing over the Mediterranean and after a reported fall in bookings at Thomas Cook (LON:TCG).
Banks and other financial companies were top risers for a second-day running as markets price in an eventual improvement in net-interest margins as US interest rates rise. The jump in bank stocks may be a little premature; the rest of the world, especially Europe is likely to be a long way behind the Fed in raising rates.
3i (LON:III) was best of the bunch after the private equity group raised its dividend on the back of reporting a total return of 22% in the last year.
US
US stocks saw heavy opening losses with the Dow Jones down triple digits to its lowest since March 17 despite shares of Walmart (NYSE:WMT) rising nearly 10% after beating earnings expectations. A quicker rise in US interest rates risks deflating inflated asset prices amid a slowdown in corporate earnings.
Market pricing still suggests a rate hike in June is unlikely, but the odds have improved significantly following the minutes. The Fed is certainty aware of market expectations and by explicitly referencing June as a ‘live meeting’ are trying to massage them in the right direction. As is often the case with communications from the Fed, these minutes were an exercise in managing expectations.
FOMC board member’s willingness to raise rates in June had the usual caveat of needing to see stronger economic data. It is for this reason a June rate hike still appears unlikely. It is unlikely there will be enough time to turn the tide of what has been mostly weak economic data this year. However the odds of a move in September have improved to the point that it now appears the most likely date, should the recent trend of data improvement have any legs.
An unsolicited bid from German pharma giant Bayer (LON:0P6S) lifted the shares of US agro-chemical firm Monsanto (NYSE:MON). The risk for investors jumping in on the merger is that it gets added to a growing list of deals scuppered by the US government.
Tesla (NASDAQ:TSLA) shares opened relatively unscathed after the electric car firm announced a $2bn rights issue to finance production of its new mass-market model 3.
FX
US dollar index was relatively unchanged after a sharp move higher on Wednesday with commodity currencies extending losses whilst safe-havens like the yen and Swiss franc rebounded.
The British pound extended gains after a surprisingly big jump in retail sales for April and a higher revision for March dashed fears that the referendum would slow consumption. It’s feasible there’s some front-loading of purchases before the Brexit vote but much more likely that shoppers just couldn’t stay away from deflating high street prices.
Commodities
Dollar strength following hawkish Fed minutes sent commodities lower across the board. Gold slipped below $1250 per oz and crude oil fell for a second day after the Brent contract came just shy of $50 per barrel.
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