Markets pause before Fed, Brexmas election eyed
A blow off top or just a moment to pause ahead of the Fed;
either way the S&P 500 edged back from its all-time high to close
down marginally on Tuesday. Asian markets have broadly followed the lead.
Coming off a dip yesterday, European markets were flat to slightly lower
at the open with the FTSE just a little under 7300 and the DAX holding above
12,900. Bonds remain pretty stable with bunds at -0.35% and US 10s at 1.83%.
Markets are in wait-and-see mode as we await the outcome of the FOMC meeting
tonight. The Fed is all but certain to cut for the third time in a row, and
while Jay Powell will of course leave the door open to further cuts, there’s a
sense this should be the last cut this year. The FOMC is already divided on
cuts, putting pressure on the dovish core to justify why more are needed, and
although there has been some softening in the economic data since the last
meeting, it’s by no means all bad and the immediate market-based pressure to
cut has subsided. More in our Fed preview later.
There is a risk a balanced statement is taken as hawkish by markets, given the
weight of expectations. That’s a key reason why the Fed won’t surprise by not
cutting – doing so will only tighten financial conditions and undo all the
positive energy from cuts it’s already carried out. But it may start guiding
markets to expect the current mid-cycle adjustment to finish.
However given growing market expectations for the Fed to make this its last cut
if the year, markets could be met with a dovish surprise. Funnily enough a lot
may depend on the Q3 advance reading ahead of the Fed statement. A sub-2%
print is on the cards. Weakness in manufacturing and a slowdown in the global
economy are starting to weigh on the American economy, but we think the
consumer remains more resilient.
USDJPY is near 2-month highs a little under the 200-day moving average
at 109. If the market sees a hawkish cut a push above that level is on,
bringing 109.50 into view. Also bear in mind the Bank of Japan, which may use
the cover of other central banks easing to hoover up even more Japanese
securities. It’s expected to stand pat but signal it may act if required. A
surprise move to additional stimulus would further pressure JPY. However an
easing in trade tensions and softer yen means the BoJ doesn’t need to panic.
Overnight data showed Japan retails sales surging in
September by 9% but this was due to consumers bringing purchase forward before
the sales tax hike so will only make the Q4 numbers look even worse.
The dollar backed off highs against the euro yesterday. EURUSD regained
the 1.11 handle and is sitting pretty at 1.1110. Data this morning showed
France’s economy grew more than expected in the third quarter, expanding 0.3%
in the three months to the end of September. German inflation data is on the
way all morning.
GBPUSD continues to track around the 1.2850/1.290 area and will likely
remain in ranges before the election. In early trading cable pushed up to 1.29
and could yield more upside as the market works itself out. But you feel it’s
going to be hard to see a break above 1.30 unless there is real momentum in the
polls. And with no deal seemingly averted, the downside is limited from here.
Could be treading water until Christmas.
Quick word on Brexit – well it’s on pause. No! But that’s because we get six
weeks of General Election bants instead. Yes! Sterling will now become a
hostage to polling data. Polls
showing a Tory majority win is net positive as it would mean leaving with
Boris’s deal, while anything else is net negative as it implies new
Gold is making tracks south with markets eyeing the Fed to pause its
rate cut cycle. Real yields are ticking higher with 10-yr TIPS up to 0.23% from
0.1% at the start of the month. The problem for gold right now is that
inflation expectations are falling and the Fed looks set to stop its easing
cycle for the time being and we’ve seen US Treasury yields rebound.
Standard Chartered shares rose in Hong Kong after the
bank posted a quarterly profit of $1.2bn, up 16% from the year before. It’s
beaten expectations amid a challenging environment and managed to keep costs
flat while simultaneously growing revenues. StanChart seems to have shrugged
off any ill effects from the US-China trade war and unrest in Hong Kong. Return
on tangible equity climbed to 8.6% for the nine months YTD, seemingly on course
to hit 10% by 2021. It’s facing growing headwinds though, so much like peers
this profitability target is not a slam dunk despite the solid performance this
Next produces a similar set of results each quarter –
online going great guns, in-store floundering. So no surprises from today’s
breakdown showing online sales up 9.7% and in-store down 6.3%. Product full
price sales were net +1.6%. It’s getting something, indeed a lot, right but
there comes a point when they’ll be expected to do something about the store
estate to reduce costs.
Overall Q3 full price sales rose 2% including interest
income, beating guidance. September’s warm weather hit sales but the cold
snap in October was a boost – this bodes well for Q4 although management don’t
see the same uplift for the rest of the year as they witnessed in October. Full
year profit guidance maintained at £725m Importantly this
means annual profit growth again at Next. It’s small at just +0.3%, but
it’s a whole lot better than the May forecast of -1.1%. Shares slipped
probably due to the September soft patch. All in all though Next is in good
shape. We noted in July and that Next had delivered a blockbuster second
quarter as sales growth picked up markedly and was well ahead of
expectations. Despite the gloom it’s been raising rather than lower
guidance – the FY outlook could still conservative.
Deutsche Bank – the erstwhile German powerhouse
reported a loss of €823m in the third quarter and a 15% decline in revenues.
The loss is in large part due to restructuring costs that are the necessary
evil of trying to get the bank back to profitability. Can it get any wurst?
Management are comfortable with the figures, largely because they reflect large
restructuring costs that they think will not last forever and the core bank
posted a pre-tax profit of €352m. Restructuring takes time, of course, and may
be more expensive than analysts think, but Deutsche has had a decade and
several attempts at this already. And the decline in revenues can’t be masked.
Bond trading is about all it has left in investment banking and the fixed
income division posted a 13% drop in revenues. Shares -3.5% in early trade.