European shares look to play catch-up again this morning after US stock markets rallied with a sigh of relief that central bankers are still supporting the run up in asset prices through accommodative monetary policy.
A fairly neutral Fed managed to walk the line of moving in the direction of hawkishness without spooking markets. The FOMC raised estimates for the end of 2015 to 1.375 to 1.125, tapered another $10bn and kept the key phrase that rates will stay close to zero for a “considerable period of time”. Fed Chair Yellen kept a similar tone in her press conference only saying “labour markets are yet to recover” and that the “economy is expanding at a modest pace, and inflation is below its goal”.
If timing of first rate hike is assumed to be the same based on the forward guidance statement then the only conclusion from the raised feds funds rates estimates is that rates will rise quicker after first rate hike than previously thought. The difference for now is nominal but the longer the first rate-hike is pushed out, potentially the faster the hikes will have to be afterwards to keep inflation in check. Until then, it looks like the Fed are giving markets the signal for full steam ahead.
In Europe the allotment of TLTROs from the ECB could be a key piece of event risk for mainland Europe. Given the announcement of asset purchases there seems like limited downside for European stock markets from any disappointment in the TLTRO but it would go to show the limits of ECB powers; If there’s no demand for the loans because of a weak economy then just lowering the cost probably isn’t going to do much.
Global markets have been bouncing around this week awaiting potentially huge-market moving events, with the Fed seemingly not encumbering markets for now, it only really leaves the Scottish referendum and potentially the Alibaba Group Holdings Ltd (NYSE:BABA) IPO as a barrier to the next leg higher in the bull market.
UK retail sales are released today but the impact should be minimal with investors hesitant about dealing in UK assets before Friday’s referendum results.
EURUSD – The euro tested the key 1.30 psychological level from the underside, failed to break through and subsequently made new 14 month lows and looks set to target 1.2750, the lows from March and July 2013.
GBPUSD – The pound pushed into 2 week highs but wasn’t able to hold the gains and ended up forming a shooting star reversal pattern on the daily chart closing back below 1.63. 1.60 remains the big psychological level which coincides with the 61.8% retracement of the rally since July 2013 and a move below there could spell a new era of weakness for sterling.
EURGBP – The euro sterling cross has been trading back and forth between 0.7890 and 0.8035 and has now fallen right back to the bottom of the range, a bounce is possible near term but the risk remains for downside breakout.
USDJPY – Dollar yen flew higher today straight through the 108 level trading up close to 109.70. The move is starting to look parabolic but there is still no signs of divergence with RSI which is still making higher highs alongside price.
Equity market calls
FTSE 100 is expected to open 15 points higher at 6,795
DAX is expected to open 24 points higher at 9,685
CAC 40 is expected to open 11 points higher at 4,442
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