Europe
Shares in Europe were stumbling a bit today; the rally in stocks since August 8 is starting to run out of steam in choppy summer trading conditions after the Bank of England minutes revealed a shock double dissent of the decision to keep interest rates unchanged.
The price action in European indices has had all the hallmarks of trading in August with a surge one way and then the other, ultimately ending with little progress and prices going sideways.
The Bank of England’s Monetary Policy committee voted 7-2 in favour of keeping rates unchanged, a variation from the 9-0 seen for near on three years.
The votes are a little dated given that earnings and inflation data has weakened since the MPC meeting so there is some chance that the votes will be a one-off or that no other members will dissent at the next meeting.
The lower inflation and earnings growth cast doubt over the significance of the votes and a rate-hike this year still seems unlikely but central banks typically work off a longer timeframe than just one month's data so there is clearly a change of mood at the BOE.
The FTSE 100 extended early losses after minutes were released with investors none too happy at the improved prospects of a rate hike sooner than expected and likely cutting into how long the bull market in stocks can last.
It was the third failure of M&A prospects between UK construction giants Balfour Beatty (LONDON:BALF) and Carillion Plc (LONDON:CLLN) that got UK market sentiment off to a bad start. Carillion Plc (LONDON:CLLN)’s latest offer is a 36% premium over Balfour Beatty’s share price a month ago. Another bid with a premium larger than 36% would be getting fairly pricey and probably not in Carillion’s best interest which renders the whole deal potentially dead in the water.
Persimmon (LONDON:PSN) and Barratt Developments Plc (LONDON:BDEV) were undoing yesterday’s gains as hopes that the housing market would be supported by lower rates for longer based on missed inflation data was dashed by the two MPC members voting for a rate hike.
Beverage companies Diageo (LONDON:DGE) and Sabmiller (LONDON:SAB) were a drag on the FTSE today after rival Carlsberg (COP:CARLa) reporting that geopolitical tensions with Russia reduced demand in the country despite no official sanctions on imported alcohol.
US
Shares in the US were trading tentatively ahead of the meeting minutes from the Federal Reserve but with the release not until 2pm EST it was largely corporate earnings that were driving markets early on.
Shares in Target Corporation (NYSE:TGT) fell after missing estimates and lowering guidance for the year while Lowe's Companies Inc (NYSE:LOW) beat estimates but also pulled back guidance for the year. Staples Inc (NASDAQ:SPLS) declined on more weak numbers as the company shut down stores as part of its turnaround plan to compete online.
This latest rally in stocks has been supported by some goldilocks economic data that is good enough to support corporate profits but not so good as to risk a change in stance at the Federal Reserve over keeping interest rates close to zero.
Expectations for low rates for “a considerable period” in the US could be called into question if there are murmurings of a change in sentiment in the latest Fed minutes released today. There was one dissenter, Charles Plosser but comments after the latest meeting from known hawk Richard Fisher suggest the opinion could be more widely held.
If minutes indicate some Fed members have become more hawkish; going up against the dovish bias of Fed Chair Janet Yellen, stock markets could be hit quite hard. The likelihood is though that the minutes will continue in a similar to vein to other statements that emphasise labour market slack as an ongoing problem
FX
The US dollar was mixed ahead of the key economic data from the Federal Reserve, with any indication that the fed is leaning to the hawkish side likely to undo or accentuate current trends with dollar strength.
GBP/USD was off its lows while still under the 200 day moving average after the BOE minutes, more strength from the pound was notable in EUR/GBP and GBP/JPY.
A trade deficit larger and worse all industries activity than expected helped bump USD/JPY to 3 ½ month highs finally clearing the 103 handle.
Commodities
Copper was higher by over 2% after holding above $3.08 per lb on the back of potentially stronger demand from the US housing market undoing declines being seen in Chinese housing.
Crude Oil prices are rebounding today after Brent Oil came within a whisker of hitting $100 per barrel yesterday. Dovish comments minutes from the Fed could undo some of the recent dollar strength and allow energy prices to recover some of the declines from June.
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