Equities remain cautious ahead of the start of the Federal Reserve meeting today. The S&P 500 and the Dow were pretty well flat yesterday, whilst the FTSE 100 notched a slight gain. Asia has been mixed. Futures indicate European equities are trading on the flatline again. Equities are lacking direction and will wait for the Fed to get a steer.
Equities investors are likely to display caution with the Fed in view. They may be disappointed with what the Fed offers – realization of this may manifest in mild selling ahead of the meet. We’ve got no signs of progress on trade and little sense the G20 will produce anything. And now we have building tensions in the Middle East.
The White House has ordered 1,000 US troops to the region, with fears of escalation rising. Tehran says it will breach uranium stockpile limits in days. The Iran nuclear deal looks dead. Markets may start pricing in risk of escalation. Whilst this is only a very small number of additional manpower, and is clearly designed to act as a warning to Tehran, troop build-ups only tend to lead in one direction.
The pound is at its lowest in almost 6 months on heightened fears of a no-deal exit. Boris Johnson is the clear favourite to become the next PM – in fact it rather looks like he’s going to walk it. Currency markets display fear that he has said he is prepared to take Britain out on October 31st without a deal if needs be. More BoJo, less mojo. Whilst a crowded trade there is real slippage here with little to spark life into the pound.
The calculus is simple – failure to take Britain out of the EU this year risks a General Election and wipe out at the polls at the hands of the Brexit Party, potentially handing Jeremy Corbyn the keys to Number 10. The EU says it won’t renegotiate (it may have to), MPs won’t accept the existing deal, and Parliament has limited scope to stop this train.
Sterling is increasingly reflecting the no-deal risk. Cable was last hovering close to its lowest of the year at 1.2530, having dipped as low as 1.2510, its weakest since the start of January. 2018 lows around 1.2470 could be the next target on the downside. BoE this week may signal tightening bias and readiness to hike earlier than previously expected, but the pressure on the pound remains because of Brexit. The BoE should be minded to remain on the sidelines until Brexit is decided.
Australia’s dollar is also soft and susceptible to a major downside breach after minutes from the last RBA meeting showed more cuts are coming. More likely than not we should get at least one more cut this year.
The minutes said: ‘Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead.’ This was extremely strong signal and suggests more cuts to come and soon. Excluding the Jan flash crash we are now testing multi-year lows, on the cusp of a move back to decade lows not seen since the height of the financial crisis. At 0.6830 the AUD/USD cross was testing major support – this could hold until we get further clarity from RBA governor Lowe on Thursday.
Oil has failed to catch any tailwinds from the Middle East tensions. Brent was below $61 again but remains clear of last week’s lows. WTI was holding $52. All looking very bearish and flaggy right now. Until we get a good dose of economic data this rut seems set to continue.
Gold keeps cranking higher – the prospect of lower US yields and geopolitical tensions seem to be acting as a tailwind. Last at $1346 the big target for bulls is the 2018 peaks at $1365 and then the 2017 highs at $1375.
Ashtead FY numbers are positive, with EBITDA at £2.11bn, a slight beat as revenues rose 19%. The medium term outlook looks confident. Despite fears of slowing growth in the US, management say they expect to continue to experience strong end markets in North America.
EUR – ECB President Draghi Speaks (08:00)
EUR – German ZEW Economic Sentiment (09:00)
EUR – CPI (09:00)
USD – Building Permits (12:30)
GBP – BoE Gov Carney Speaks (14:00)
EUR – ECB President Draghi Speaks (14:00)
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