Morning Briefing – Fed-fuelled bounce

<p>Reduced likelihood of a Fed hike, upbeat US economic data, and probably short covering are steadying the ship again, with sterling and stocks rising in Asia and now in Europe. </p>

  • Reduced likelihood of a Fed hike, upbeat US economic data, and probably short covering are steadying the ship again, with sterling and stocks rising in Asia and now in Europe. The overnight release of minutes from Federal Reserve rate setters triggered the cross-market bounce, springing US 10-year Treasury yields of record lows marked earlier on Wednesday and shoving the dollar down further. The key phrase from the FOMC minutes markets latched on to was that it was “prudent to wait” for more economic data, before deciding on rates, a clear enough signal that borrowing costs would be kept static when the Fed updates policy at its 26th-27th July meeting. Officials expressed concerns about a Brexit vote in the minutes, which were taken before the 23rd June referendum.
  • Fed fund futures for December now imply a rate of 38.5 basis points, pretty much where the effective rate is now. The market is not fully priced for a hike until the start of 2019. The weight on the dollar from an  almost confirmed delay to tightening also helped oil futures, lifting US crude 1.3% or 61 cents at online time to $48.04 a barrel, partly pricing in an expected drop in stockpiles shown by the weekly IEA report that will be released at 4pm London time.
  • Ahead of that, monthly UK manufacturing output’s slippage by 0.5% wasn’t as bad the 1.1% slide feared and year-over-year, the 1.7% jump beat the 0.7% forecast. The less influential industrial production reading was also promising—it rose an annual 1.4% against half a per cent expected and slipped 0.5% vs. the month before compared to a 1% fall foreseen. But these data are from May. At best, they belie the pre-Brexit slowdown shown by other readings. The factory sector might well have deteriorated since. Either way, the pound against the dollar sailed on. It was up 0.4% at last check at $1.2974, though nowhere near any sensitive points from what I can see, having careered off highs as far away as $1.33 this week.
  • Balancing the stock market rebound are further worries in the property sector. Another three funds halted redemptions by investors, capping the sector’s shares. Still, the FTSE was up 1.5%, including the blue-chip housebuilders and commercial developers, suggesting a weakening of any binary link between property investors and the wider sector. Time will tell.
  • Retailers were offering a mixed input for UK shares, with M&S mentioning but not blaming Brexit for another sales slowdown, Sports Direct citing the minimum wage and Primark owner ABF expecting the weak sterling to propel its earnings above earlier guidance.
  • The Nikkei didn’t benefit from the bounce, because the yen hasn’t taken a break—last at 100.94, another 40 sen up per dollar.

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