Today's markets: Shares rise as bank meetings kick off

The Fed kicks off its two-day meeting today. Stocks rose early on Tuesday in Europe after a solid session for Wall Street on Monday, with the Dow Jones hitting a fresh all-time high. The FTSE 100 is leading the way, up 0.7 per cent while shares in Frankfurt and Paris are up 0.35 and 0.5 per cent respectively. The FTSE 100 was lifted by a big jump for Kingfisher (KGF) as it upgraded its full year earnings outlook while Marks & Spencer (MKS) received an upgrade from Jeffries. The blue chips are going strong and the mid-cap FTSE 250 is up about a quarter of a per cent.

Monday morning kicked off with markets seeing a 59 per cent chance the Federal Reserve would go with a jumbo 50bps cut this week to begin their easing cycle. That’s now up to 69 per cent and points to a degree of miscommunication from the Fed. It’ll be a surprise either way – the level of uncertainty so close to a decision is at its highest since 2007. I don’t think it matters a heck of a lot whether it’s 25 or 50 in the grand scheme of things, but the uncertainty means positioning is tricky and the delta is potentially larger in the immediate aftermath.

Markets may not be fully appreciative of the risks from going deep now – the election will be on the minds of policymakers for sure, even if it doesn’t materially affect their decision. Also, their minds is the financial market instability from August and, to a lesser degree, earlier this month. If the Fed goes big, it would further close the yield spread with Japan, which could result in further deleveraging in carry trades and equity market turmoil. The case for a big cut is clear enough – even with 100bps of cuts this year they’d still be well above the neutral rate – so why delay? It is interesting to note that with inflation above 8 per cent and about to hit 9 per cent, they hiked just 25bps. Too loose for too long on the way and the risk is that they are too tight on the way out for too long.

Staying with the Bank of Japan, traders seem to agree that the central bank will not hike interest rates this week. Again, their eyes are on that carry trade. Although ultimately we know the Fed has more cutting to do and the BoJ has more hiking to do, it’s about the speed of the moves. Hiking at the same time as a big cut by the Fed could cause unnecessary strain for low volatility trades and they are mindful of the ripple effect on equity markets.

Elsewhere, Amazon wants all its staff back to work five days a week. Shares fell. I feel like it’s management trying to justify their positions and failing to adapt. If a worker is able to do their job from home, what point is the manager?

By Neil Wilson, chief market analyst at Finalto