LIVE MARKETS Fed tightening cycle: bend it like the Footsie
- European shares fall 0.6%, off lows
- Fed likely to hike rates in March
- U.S. futures in the red
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FED TIGHTENING CYCLE: BEND IT LIKE THE FOOTSIE (0959 GMT)
Many pundits expected London’s FTSE 100 to do quite well when the Fed decided to embarked in this new tightening cycle.
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And it did!
Not only is the Footsie one of the only European benchmarks to trade in the black this morning, it’s also outperforming the other blue chip benchmarks this year.
It’s up 1.3% since the beginning of 2022, against a 4.5% fall for the pan-European STOXX 600.
The fact that London’s star index is overweight on the value/cyclical side with big financials and commodities stocks while quite light on tech, makes it a good bet to trade rising yields, or so common wisdom goes.
As you can see this morning, so far, it’s going according to plan:
Betting on UK PLC has been a losing trade for some years but it seems those advocating for a “Buy UK” strategy are finally being vindicated. For now.
Check out this story for more background:
ANALYSIS-Cheap and unloved UK Plc still can’t shake risk discount read more
FED SENDS EUROPE’S TECH TO CHECK OUT THE BEARS (0920 GMT)
That was close!
The Fed’s hawkish stance sent the European tech sector just a whisker from bear market territory early this morning.
At the worst of its fall early this session the index was down 19.9% from its November highs, just 0.1% from what typically defines a bear market.
The index has now cooled down and is losing just about 2.1%.
But if Microsoft‘s results hadn’t soothed investors yesterday, it’s more than likely that this chart would be looking a tad different today.
Check out our story on Microsoft‘s results:
Microsoft offers strong forecast, lifting shares read more
A hawkish Fed is taking its toll on markets and in Europe equities kicked off the session in risk-off mode.
Tech is falling all the way down to the lowest since May 2021, down 2.7% on bets policy tightening will compress the industry’s rich valuations, but rate-sensitive banks are taking that positively, climbing more than 1% to a one-week high.
Earnings updates also came in play. Deutsche Bank made its biggest annual profit in a decade, sending its shares rallying 4%, while software maker SAP slid 7% even as it confirmed its Q4 were boosted by growth at its cloud business.
MORE THAN FOUR (0801 GMT)
The world’s largest economy is predicted torecord GDP growth at a 37-year high of 5.5%, with data due later on Thursday. Some such as JPMorgan reckon the figure could be as high as 7.5%. We will also likely see weekly jobless benefits claims dropping further.
That, in a nutshell, is why the U.S. Federal Reserve feels there is “quite a bit of room to raise interest rates”.
Could there be more than four rate rises this year? Powell did not deny that possibility, so markets have started to price a fifth move.
Accordingly, Treasury two-year borrowing costs hit 23-month highs, shrinking the gap with 10-year yields. And on t-bills, the shortest-dated debt segment, Tradeweb notes a sharp steepening, with the gap between the three- and six-month yields at the steepest since 2015, and more than double from a month-ago period.
Similar steepening is notable between other bill maturities in a sign more tightening is being priced.
So the stock market selloff that had abated pre-Fed is back in full swing, with world stocks down 0.6%; European and Wall Street looking set for another tumble.
But if buyers are running scared, there are bargain hunters of a different sort — billionaire William Ackman said he had snapped up $1 billion worth of Netflix shares since last Thursday’s market tumble.
Companies, meanwhile, continue to deliver good news; Tesla for instance predicted 50%-plus growth this year, while Deutsche Bank posted its biggest profit since 2011. But with buyers still in hiding, Tesla shares tanked in after-hours trade.
Key developments that should provide more direction to markets on Thursday:
-China’s industrial firms saw December profits grow at slowest pace in 1-1/2 years read more
-German consumer morale improves slightly
-New Zealand inflation at three-decade high read more
-South Africa expected to raise rates by 25 bps
-U.S. durable goods/advance Q4 GDP reading/initial jobless claims
-U.S. 7-year note auction
-European earnings: LVMH, Dr Martens, UniCredit Britvic, St. James’s Place, STMicro, SAP, Deutsche Bank, IG Group, Diageo, Sabadell, SEB, Polymetal
DOWN (SHARPLY) WE GO AGAIN (0730 GMT)
Relief from a no-surprise Federal Reserve statement lasted only about 8 minutes yesterday but after that initial brief spike Wall Street headed south in wild swings that took the Dow Jones and the S&P indices in negative territory.
“Risk assets… reversed once Chair Powell began to speak. Investors inferred that his greatest concern is being behind the curve, and that policy will be tightened more rapidly than previously believed.” said Ian Williams, analyst at Peel Hunt.
And world markets are taking notice. In Asia shares tumbled to their lowest in nearly 15 months and European equities look set to follow with futures down 1.4-2.1%. U.S. contracts meantime indicate the selloff is set to extend to a second day.
The Federal Reserve said it is likely to hike interest rates in March and reaffirmed plans to end its bond purchases that month in what U.S. central bank chief Jerome Powell pledged will be a sustained battle to tame inflation. read more
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