October 31, 2019 / 8:44 AM / 19 days ago

Daily Briefing: Fed's "hawkish cut" fails to spook

LONDON (Reuters) - What many initially interpreted as a ‘hawkish cut’ from the U.S. Federal Reserve late Wednesday hasn’t exactly played out that way in the market reaction, with drops in the dollar and U.S. Treasury yields matched by a rise in U.S. stocks – suggesting investors are still convinced of further easing, even if not necessarily by yearend.

Traders work as a screen shows Federal Reserve Chairman Jerome Powell's news conference on the floor of the New York Stock Exchange, October 30, 2019. REUTERS/Brendan McDermid

And so if Fed chair Jerome Powell and his fellow policymakers were trying to signal a pause in the easing cycle, then it’s only seen as a temporary one. The Fed’s quarter-point interest rate cut was widely expected of course, but the accompanying statement dropped the phrase that it would ‘act as appropriate’ when considering future moves.

That was seen as at least raising the bar very high for another cut in December and futures markets move to cut the chances of cut by yearend to as low as 20% from 30% yesterday and as high as 70% earlier this month.

Another cut is fully priced by next June, however. So much is now contingent on a trade truce between the United States and China and for all the positive words on that, no one – including the Fed – can be sure of the outcome.

Even though the cancelled APEC summit in Chile appeared to complicate the timing, as President Donald Trump and China’s President Xi Jinping were due to meet there, officials said it should not derail the signing of what they now call “Phase One” of a trade agreement.

Wall St’s S&P500 climbed another 0.3% to another record high close. Stock futures continued to nudge higher overnight, with Apple’s shares rising about 2% after the bell when it released its latest earnings. While iPhone sales overall continued to struggle, it gave an upbeat review of its latest product range and impressive guidance for the final quarter of the year.

Facebook stock also rose almost 5% after it reported an uptick in users and beat forecasts with its third straight rise in quarterly sales growth.

The dollar, meantime, was the biggest casualty from the Fed meeting -  with its DXY index down again first thing on Thursday and euro/dollar climbing to about $1.1160. Dollar/yen slipped back too, even as the Bank of Japan signalled it may ease policy again too after its latest meeting.

The biggest winners were emerging market currencies – with China’s offshore yuan strengthening to its best levels since mid-August at one point earlier and MSCI’s emerging markets currency index also hitting its highest in almost three months.

Yuan strength came despite Chinese data showing factory activity shrank for the sixth straight month and services are under also pressure – reports that saw Shanghai stocks underperform in a generally upbeat session for Asia bourses.

On the flipside in emerging markets, South Africa’s rand resumed its steep decline after suffering the worst tumble in over a year on Wednesday with a 2.5% drop when the interim budget painted a very glum picture of bulging deficits and mounting debt ratios ahead for years to come, frightening investors who are closely watching Moody’s upcoming credit rating review on Friday.

In Europe, stocks opened slightly higher on a heavy earnings day on this side of the pond and ahead of flash GDP and October inflation readings for the euro zone out later.

On European corporate front, there was nothing really spooky enough in today’s Q3 batch of results to kill the Fed cut feel-good vibe. Top corporate news is of course still driven by PSA and Fiat Chrysler, who just made it official.

Among the few misses which could lead to harsh falls at the open, is Air France KLM and UK housebuilder Crest Nicholson, seen down 4% and 10-20% respectively. There’s another big day for banks with BNP Paribas, BBVA and ING above forecast. Lloyds profits however missed expectations.

Corporate updates which could cheer up investors include Zalando reporting fast quarterly sales growth and Delivery Hero upping its 2019 revenue guidance thanks to strong order volumes. No surprises in the energy sector with oil firm DNO swinging to a Q3 loss amid writedowns.

— A look at the day ahead from EMEA Markets Editor Mike Dolan. The views expressed are his own —

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