Europe
European markets continued to build on the positive momentum built up in the last few days on potential ECB stimulus and an apparent turnaround in the German economy ahead of Federal Reserve minutes that may reveal more information on the timing of the next US interest rate hike.
In the UK, the Bank of England minutes revealed the two dissenters dissented again in October; leaving the voting unchanged at 7-2 in favour of keep interest rates unchanged at 0.5%.
The minutes had a bias towards keeping rates low but opinions were a bit more diverse than was seen in the inflation report which caught markets a bit off guard and sent the pound flying off its lows.
The consensus was that slower growth in Europe will dampen prospects in the UK but the minutes revealed some members think that the lower inflation is temporary and the tightening of the labour market will eventually lead to higher wages and higher prices.
Pub companies were some of the biggest fallers on Wednesday including Punch Taverns (LONDON:PUB), Enterprise Inns (LONDON:ETI) and Spirit Pub Co Plc (LONDON:SPRTC) suffering a major setback from a government vote to end the beer-tie. The government backed plans to allow pub's to choose beers from any supplier rather than being tied to the Pub Company that owns the pub.
PubCos typically overcharge publicans for beer making it very difficult for the pubs to make money on selling beer alone; forcing the pubs into food sales and many into bankruptcy. It is hoped the new laws open up competition and should be a boon for local brewers and may help large beer company sales if publicans pass on some of the savings to consumers. With pubs closing a rate of around 30 per week, the current system clearly wasn’t working and needed change.
Royal Mail (LONDON:RMG) shares took a big chunk out the FTSE 100 leaving it lagging European peers. The company lost out as the company faces up to the difficulty of competition within its parcel network. Royal Mail has the disadvantage of offering universal coverage across the UK when competitors which now include Amazon.com Inc (NASDAQ:AMZN) don’t. At the same time Royal Mail is facing government pressure not to cut jobs and branches which although painful could improve efficiency and redress the balance of power with the likes of FedEx Corporation (NYSE:FDX) and Amazon.
US
Shares in the US drifted slightly lower in early trading as investors took some money off the table heading into Fed minutes which could either confirm or deny the latest more hawkish statement potentially swaying markets either way.
The Fed tweaked some of the language in the latest statement while keeping the “considerable period of time” reference to how long rates will be kept low. The Fed has been treating markets with kid gloves in recent statements and the latest minutes could again involve discussion of how to relay changes in Fed policy.
What the Fed have been engaging in is in large part building up confidence; if they say something out of line and markets crash, that’ll impact confidence and undo the progress made since the financial crisis.
Retailers Target Corporation (NYSE:TGT) and Lowe's Companies Inc (NYSE:LOW)’s beat estimates on Wednesday lifting their respective shares.
FX
The US Dollar Index was gaining against most major currencies heading into the Fed meeting on the expectation that the FOMC will reiterate its positive stance on the economy in the light of improving economic data including a tightening labour market.
A more hawkish Fed that emphasises the strengthening labour market should push the US dollar higher whereas a more dovish Fed that emphasise the slowing inflation or even worries about the strength of the dollar could send the dollar lower.
USD/JPY made new 7-year highs above 117.70 after the BOJ reiterated its stance on its expanded quantitative easing but will be exposed if the Fed sound more cautious and could below back below 117.
Commodities
Gold traded sideways around $1,200 per oz going into the Fed meeting. Gold’s recent rally has been despite Fed policy so today’s meeting will either add credence to the move or limit further upside.
Crude Oil prices saw a technical rebound off their lows with WTI around $74 per barrel and Brent Oil around $78 with not much further impetus for selling before next week’s OPEC meeting.
Copper rallied off it’s all important $3 per lb support after stronger US housing data that saw housing starts fall unexpectedly while housing permits increased dramatically.
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