LCG Research Team: The Federal Reserve (Fed) maintained the status quo as expected. What was less expected however was the FOMC’s optimism regarding the economic outlook and near term risks.
Global growth concerns, higher political uncertainties following the UK’s decision to exit the European Union, nor shenanigans around the US presidential election could dent the FOMC’s enthusiasm about the future.
As the Fed warned that an interest rate hike remains well on its agenda for this year, the probability of a rate hike in September surged to 25%.
Although one would rather expect the US dollar to rise steeply following a more-hawkish-than-expected FOMC statement, the greenback depreciated across the board.
Apparently, the idea of a September hike couldn’t gain enough momentum in the foreign exchange markets, as the Fed did not comment on the timing of a potential rate hike.
Nevertheless, the jitters around the possibility of a rate cut fully waned. The absence of negative skewness in US rate expectations could build a base for a stronger US dollar onwards, given that the Bank of Japan (BoJ), the European Central Bank (ECB), the Bank of England (BoE), the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) are among the leading central banks preparing to further ease their monetary conditions.
Sterling Down Rally
The sterling has been the unique loser against the US dollar heading into the European open. The GBPUSD bounced lower from 1.3248 as traders sold into the knee-jerk rally on the back of a wider monetary policy divergence between the Fed and the BoE.
The only fact that the FOMC refrained from refashioning its strategy post-Brexit gave the market enough conviction to short the sterling. Even if the Fed isn’t in a position to act by September, higher US rates will hit the market sufficiently soon. It is certainly just a matter of time before the sterling slips below the 1.30 level.
In the UK, the corporate agenda was very busy this morning. A large pallet of companies announced earnings. So far, 46% of the 500 biggest UK companies have reported earnings. Overall, sales surprised on the upside by 1.21%, and earnings beat estimates by 5.76%. Of course, energy and miners remained at the bottom of the range due to a further squeeze in their profit margins and revenues.
Distressed Oil Prices
Royal Dutch Shell has been the major surprise of the day. The energy giant’s profits dropped by 72% in the second quarter on the back of cheaper oil and narrower refining margins. Shell underperformed its competitor British Petrol, which announced a 44% decline in its profits over the same period.
Oil prices remain at distressed levels as the slow global demand remains decently short of the global glut. Still, Shell’s future earnings are expected to recover gradually.
Hence, 58% of brokers recommend to buy Shell stocks at the current levels with a twelve-month price target set at 2148p; 32% prefer to hold Shell stocks in their portfolios, while less than 10% advise selling. On a side note, we could expect a deterioration in this picture as today’s negative surprise could bring some brokers to revise their recommendations.
BP’s stock price is also seen more than 5% higher in twelve months. 55% of brokers recommend to hold BP shares, 35% advise to buy. Again, there is a resilient 10% looking to short the energy giant’s stock.