Delay In Fed Normalisation Boosts Appetite In Equities, EM Currencies

FTSE remains anchored to 7000

Last night’s Fed minutes all but ruled out a rate hike in June owing to the weakness of first quarterly growth and the lack of inflation. More recent weak macro data from the US would also imply that even these set of minutes are out-of-date and the market is now pricing in rate hike for early 2016. No surprises were to be found within the minutes.

A host of corporate earnings this morning in the UK has kept the FTSE anchored around the 7000 level once again with the financial sector keeping a cap on gains.

Royal Mail (LONDON:RMG), a company of mired in the controversy of its recent privatisation has managed the decline in its parcel business to a degree whilst keeping a lid on costs has led to efficiency improvements - profits are down but not as much as market expectations. In a competitive space, one questions whether enough is being done to expand the parcel business.

Revenues were flat and profits have declined for the full year, but not to the extent that the market expected, down 9%, not the 16% as expected. Royal Mail shares have flirted with £5 in the run up to the numbers, still well short of their inflated post IPO highs. No doubt many investors are keeping faith thanks to the Royal Mail's 5% dividend growth, yielding around 4% at these levels, one of the key perks highlighted to people before the government’s float.

National Grid (LONDON:NG)’s improvements to the power network will see benefits to the consumer. Shares have been range bound for around a year now. Today’s release is promising if not spectacularly exciting for shareholders, further benefits from underlying improvement work should be seen in the coming year. The dividend should keep the medium term investor satisfied for now.

Manufacturing PMI has once again shown the changing fortunes of France and Germany; with the former beating expectations but remaining in contractionary territory with a print of 49.3.

Service output for the two member states was slightly less than the consensus view and has had little impact on the euro this morning.

Here in the UK, the macro picture is looking better. Retail sales rose 1.2%, well above the 0.4% expected. Year on year, retail sales have now grown 4.7%. The pound has rocketed higher to 1.5630 against the dollar.

The manufacturing output theme continues this afternoon in the US with the release of the Philly Fed Manufacturing index. A rise from 7.5 to 8.1 is expected here.

Improvements are also expected in home sales; with 5.23m slightly higher than the prior 5.19m. Unemployment claims on the other hand are expected to rise from 264,000 to 271,000.

The Dow is slated to open down 40 points.

S&P 500, Dow Jones at fresh all-time highs

There has been no surprise in Fed minutes, yet finally, the market could have more clarity on Fed’s short-term outlook. It appears that a June rate hike is very much unlikely given that the latest slowdown in the US recovery is now being brought forward. On a side note, the rumours that the GDP computations may be incorrect and US government sites being hacked, crowd the information wires.

The S&P 500 and Dow Jones hit fresh all-time highs following the Fed minutes, the US dollar reversed trend across the board. Now that the June hike is no more in consideration, the market is pricing a 50-50% chance for a December action. According to activity on US sovereigns, the market is pricing a greater probability for the first rate hike to happen by the first quarter of 2016. Apparently, the step toward normalisation will be more difficult than previously thought. In a zero rate environment, the manoeuvre margin is very tight. Yellen is aware that a wrong timing can cost years of efforts. But what is the right time anyway?

Brazil’s real rallies following the dovish Fed minutes

The EM currencies are happily welcoming the short-term carry inflows as the cheap liquidity environment will keep the US yields at subdued levels for another quarter. The BRL tests support at 3.00, the three week ascending base versus the US dollar; a break below this level should pave the way toward 100-dma (2.9144), a strong support since August 2014. Brazil’s mid-month inflation report is due tomorrow and the expectation that the inflationary pressures may have cooled-off to 0.59% on month could lead to a positive divergence for the Real among the high-yield, UST sensitive EM complex (TRZ, ZAR, INR).