BetOnMarkets

Financial markets are a sea of red numbers today as the classic ‘Fade the Fed’ trade plays out. The initial reaction to last night’s interest rate decision was neutral to positive, then the selling set in and hasn’t stopped since. Yesterday’s rally did a very poor job of papering over the cracks in the global economy. Today those cracks wide open for all to see with housing and financial stocks hit hardest. Barclays in particular is back to square one, erasing all of yesterday’s gains as investors take a second look at their fund raising plans in light of Goldman’s predictions of further write downs for major Western banks. Citi Group has also been floored today on this news, falling to its lowest level since 1998. The twin evils of Gold and Oil are again the sectors in demand as investors seek to profit from further economic turmoil and hedge their bets against inflation. We see no significant change forthcoming until global indices revisit their March lows.

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Fed days are like the proverbial game of two halves. Recently markets have tended to have positive bias going into the meeting, but the reaction the market action post Fed announcement is an entirely different ball game. We usually see some rapid moves and counter moves as traders absorb the decision and the accompanying commentary. US markets have indeed start off higher today as traders speculate that a rate hike is less likely than previously thought. European markets set the tone early this morning, but have made little traction since. Barclays and UBS are posting impressive increases on the day, with Barclays receiving the market’s seal of approval for its plans to raise around $9bn in fresh capital. US markets were also encouraged by economic data that for once didn’t come out as worse than expected. Both Durable goods and US new home sales were roughly in line with expectations.
 
 The FTSE has been range bound for most of the day and we see little chance of this changing between now and the close. With the great unknown of the Fed announcement due after the close, traders don’t want to have their fingers burnt with any large overnight positions. 

The FTSE is currently indicating a higher open, as traders are waiting for the release of the BBA loans number. While not the most important of the economic releases, this number helps us see the risk tolerance that banks in UK are willing to take. With the end interest rate cuts in UK a given, banks will think twice to agree to loan money at a fixed rate, while their cost of borrowing goes up. Financials are going to be the focus of all the attention while waiting for the FOMC decision across the ocean.

The rise in output of oil in Saudi Arabia was wiped out by the attacks in Nigeria, helping the price per barrel rise over the 136 dollar mark. This could weigh heavily on the Consumer Confidence which is due to be released today at 14.00GMT. Consumers have been hit on every possible side, with no relief in sight, while the US consumers were given a stimulus package, not many of them spent it as predicted. Most recipients used the extra 600$ to pay for food or catch up on delinquent bills.

The FTSE is currently indicating a higher open, as traders are coming back from their weekend.  Lower then expected Rightmove house prices could not depress the market, as bad as the Monday blues will. While there is no more economic news out of UK until Tuesday, the FTSE is likely follow the Nikkei with a negative trading tone.

Oil is trading near the 135 dollars per barrel, as a mix of events over the weekend has resulted in higher prices. While the expected increase in output from Saudi Arabia was already priced in, the attacks on the Chevron pumping stations in Nigeria will cost the world supply almost all of that gain. Gold has been a winner all week, as the weak dollar theme pushed the precious metal back above the 900 level. We believe that gold will continue its rise until the FOMC meeting on Wednesday. While there is no rate cut expected, traders are interested in the language which will come out with the decision. They will be looking for clues if an interest rate increase is in the cards for later in the year.

The FTSE is currently indicating a higher open as UK and the European markets are following in the steps of the North American equity markets higher close. Friday is an economically quiet day in UK, however there is some European Union news to keep an eye on. At 6am GMT the German inflation will be released, as one of the biggest economies in the EU, this will influence the trading mood in Europe, and UK. On an off note, today is triple witching Friday, when most hedge fund traders roll over their positions to the next month, this tends to be an equity positive move.

Oil fell for the second day in a row dipping below 132 dollars per barrel. Slow down in the economy around the world, and an increase in output in Saudi Arabia is lowering the risk premium which is priced in the cost of every barrel. Gold was a winner again yesterday, and is being pushed higher, again on the back of a weak US dollar. Since there is no economic news out of US today, its a safe bet that the weak dollar theme will continue into the weekend. Gold could finish the week higher then 905 dollars per ounce.