How Did the Markets React?
UK markets have had difficulty
digesting economic data pertaining to their own country as fixed income and
equity traders were quick to act on yesterday’s interest rate decision and
subsequent statement issued by the US Federal Reserve. The Fed left rates
unchanged, as expected, but a less-hawkish-than-expected statement left markets
betting that US rates would remain at 5.25 percent for the rest of the year.
Given the 24 hour schedule of forex markets, Cable traders immediately sold off
the dollar on the Fed action. Since then, however, trading has been quiet as the
British Pound consolidated its gains, remaining propped by the surprisingly
strong manufacturing PMI reading for the UK. The figure
rose to 52.8 from an upwardly revised 52.0 (initial estimate: 51.9). The data is
very encouraging for the sector as a whole as output, new orders, and export
orders all rose while the employment component edged above the 50 level to 50.5,
signaling expansion. Furthermore, the price components gained, indicating
potential inflation pressures in the pipeline. Overall, the data reflects a
recovery for the fragile manufacturing sector and bodes well for expansion in
the first half of 2007.
Bonds – UK 10-Year Gilt Futures
Prices on 10-year gilt futures surged
to 92.78 at the London market open as traders rushed to follow
the overnight gains in US Treasuries, which rallied on the more benign inflation
outlook in the FOMC statement. However, prices subsequently eased back below
yesterday’s close to 92.66 with yields up marginally to 4.971 percent. The better-than-expected
UK manufacturing PMI reading likely
helped gilts decline, as the report signaled stronger growth for the fragile
sector along with greater price pressures, which should help the Bank of England
maintain a hawkish edge.
FX –
GBP/USD
FX market reaction to yesterday’s
FOMC decision was quite different than that of the fixed income and equity
markets, as the 24/7 schedule allowed traders to price in the action
immediately. GBP/USD spiked nearly 60 points to a high of 1.9672 on the
less-hawkish-than-expected statement, as the Federal Reserve made it clear that
it would take more consistent, positive economic data to warrant monetary policy
tightening as core inflation had started to ease. Subsequently, the Asian and
early European sessions found Cable consolidating yesterday’s gains just below
1.9700 with a Fibonacci resistance level at 1.9668. While the British Pound
didn’t show a marked reaction to the release of better-than-estimated
UK manufacturing PMI, the GBP/USD
pair was likely kept afloat because of it as the long-beleaguered manufacturing
sector appears to be continuing its slow recovery. Trading of the pair should be
relatively quiet as US NFPs loom on the horizon for the greenback on Friday at
13:30GMT.
Equities – FTSE 100
Index
London equities traded sharply higher
at the market opening this morning, taking a cue from a rally overnight on Wall
Street after the US Federal Reserve left rates unchanged and reduced the
likelihood of a rate hike later this year. By mid-morning in the
UK, the FTSE 100 had gained 1.1
percent to 6,271.90 with the help of the oil sector after Royal Dutch Shell
reported strong fourth quarter profits. Shares in Shell rose 2.8 percent to
17.53 pounds while BG Group gained 1.6 percent to 679.5 pence and BP was 0.8
percent stronger at 538.5 pence. On the downside, Rio Tinto traded 1 percent
lower at 26.88 pounds after second-half net profits missed market forecasts and
the company issued a cautious trading outlook, saying they expect some
moderation of global economic growth. Meanwhile, drug maker AstraZeneca climbed
1.1 percent to 28.71 ahead of reporting its fourth quarter numbers later in the
session as the company said it had acquired Arrow Therapeutics for $150 million
cash.
