Risk Markets Rattled on Tuesday – Fed in Focus Today

After a positive start, risk markets were seen quickly surrendering gains yesterday with widespread losses across equities and commodities markets. The sell-off was in part driven by the heavy selling in energy prices as fresh fears mounted over the China demand outlook on the back of weaker-than-forecast manufacturing data for April. The FTSE in particular was knocked sharply lower as energy stocks fell throughout the day. Focus then turned to today’s Fed rate decision and with the central bank widely expected to hike by a further .25%, downside risks remain today.

Key Factors for Today

- Fed in focus - .25% hike expected, expectations mixed on outlook and guidance
- Banking sector fears return – volatility in financial stocks
- China demand fears following weak April factory data

Market Movers

- FTSE falls below £7800
- Crude drops 6%
- Gold breaks back above $2000
- Pac West drops 40%

Econ Calendar

- USD ADP Employment (1.15pm)
- EIA Crude Oil Inventories (3.30pm)
- FOMC (7pm)

Earnings

- Pepsi
- Phillip Morris
- BNP Paribas

Banking Fears in Focus as Risk-Off Returns

Despite the broad losses seen yesterday, there were some further decent numbers from US earnings season. Pfizer posted Q1 EPS of $1.23, %25 better than forecast on revenues of $18.282 billion, 10% above forecasts. Starbucks too was seen topping earnings and revenues forecasts. In financial, HSBC came out with solid figures for Q1 with EPS coming in over double the market forecast along with a 24% beat on revenues.

Despite solid data from HSBC, banking stocks came back under pressure yesterday following an ECB banking survey which showed that lending had slowed more than expected over Q1. The data turned market focus back to liquidity concerns. Shares in JP Morgan are now almost 4% from the week’s highs following news over the weekend of an emergency purchase of First Republic Bank. Shares in Pac West, which many suspect might be the next
bank to fail, were seen falling 40% on the day before bouncing a little off the lows.

Oil prices were seen falling sharply yesterday. Crude futures sank a further 6%, falling below the 72.20 level support. Fears over Chinese demand as well as growing recession risks in the US have seen futures falling more than 14% from the YTD highs.

In FX, safe havens have been the best performers across the European open on Wednesday. The heavy risk off tone to markets has seen CHF and JPY surging higher. With the Fed on deck later today, safe-havens look likely to remain supported. Despite a .25% hike being priced in today, expectations are mixed regarding the outlook the fed is likely to give. A less hawkish outlook should see stocks rebounding while any signal that further hikes might be coming should see risk assets fall further.