Morning Call: European Market Higher While Focus Shifts To FOMC

US markets are in a recovery mode. FTSE was hammered yesterday and stocks with domestic exposure were hit hard. Theresa May's leadership is being challenged, will she survive?

European markets and US futures are picking up the positive momentum from Wall Street. Looking at the markets, it appears that traders have decided that they can work with the split government. This can be actually good for them as this will keep the Trump administration in check. The hope is that we won’t see may gridlock situations but something where both parties can work together.

Mr Trump has already shown his willingness to work with Democrats. He has said that his focus remains on growth and infrastructure projects. I think as long as his emphasis remains on vital issues like these (rather than other ridiculous policies like building the wall), there is a hope that he can claim some more victory tokens in the next few years.
The chart below shows that the investors are fully back on board with the risk on trade and three major indicies enjoyed a healthy gain yesterday 


Now, that the U.S Midterm elections are firmly behind us, the focus is going to shift on the Fed policy. The dollar index is trading lower and among the G10 currencies, it’s performance is lacklustre. The FOMC announcement on Thursday is something that we need to be prepared for. What is baked in the price is no change in the interest rate. We also expect the Fed to confirm their commitment towards future interest rate hike or in other words, bring the interest rates to their normal level.

The Fed hasn’t been much vocal about the trade uncertainties which are created due to the ongoing war between the US and China. However, one can only turn a blind eye to something for a limited time only. Looking at the Beige Book,  the picture around trade uncertainties become real. We are not saying that the U.S economy is weak, but the reality is that there has been some setback for the U.S. economy.

The weakness is around the housing market, manufacturing activity and consumer spending. All three of these are leading indicators if you want to measure the real economic health of an economy. Having said this, what is still robust is the labour market and there is some labour shortage in certain districts.
So, the overall impact of the upcoming FOMC meeting on the dollar would not be significant, because the Fed has already increased the interest rate and more importantly there is no press conference scheduled. As long as the statement remains unchanged, which we expect, we think there could be some small upward move for the dollar index.