Fed Rate Cut Speculation Fuels Currency and Equity Movements

Traders are weighing the likelihood of a significant Federal Reserve rate cut as the announcement approaches, with expectations stabilising at about 65% for a 50 basis point reduction. The dollar weakened against the yen, while US short-term Treasury yields edged higher. European stock futures indicated small losses, as robust US consumer health raised questions about the appropriateness of a quarter-point cut amid low inflation data.

Equities

The FTSE 100 rose by 0.4%, reaching its highest level in two weeks, driven by gains in retail and personal goods sectors. Kingfisher surged by 11.2% after the home improvement retailer raised its annual profit outlook, citing improved seasonal sales trends since early July. The broader retail index reached its highest point since January 2022, climbing 2.8%. Personal goods stocks also saw a significant uptick, with heavyweights Burberry and Watches of Switzerland Group each gaining 3.1%.

On the downside, aerospace and defence stocks faced pressure, dropping by 2.2%. Bae Systems fell by 4.7% amid reports indicating that some of Ukraine's allies are considering a ceasefire. Essentra shares plummeted by 15.2% after the company warned that annual operating profits may fall short of market expectations due to challenging conditions in Europe and a slower recovery in the Americas. E-commerce firm THG slipped by 12.4% as it announced plans to facilitate the demerger of its technology services arm.

In the US, the S&P 500 closed nearly unchanged after initially reaching record highs, as investors awaited the Federal Reserve's decision on interest rates. Microsoft rose by 0.88%, buoyed by the board’s approval of a new $60 billion share-buyback programme and a 10% increase in its quarterly dividend. Intel gained 2.68% after signing a deal with Amazon's cloud services unit for custom AI chips, while Amazon shares also advanced by 1.08%.

The S&P 500 ended at 5,634.58, gaining 1.49 points, while the Dow Jones Industrial Average fell slightly by 15.90 points to 41,606.18. Investors are currently pricing in a 65% likelihood of a 50 basis point rate cut by the Federal Reserve, which could have significant implications for market dynamics.

Forex & Commodities

The dollar fell sharply against the yen, dropping 0.67% to 141.365, reversing much of its overnight gains after robust US retail sales data suggested a less aggressive Federal Reserve easing cycle. The chances of a 50 basis point rate cut from the Fed fluctuated around 65%, while two-year US Treasury yields edged up to 3.5962%.

The euro slightly increased by 0.05% to $1.1119, and sterling held steady at $1.3158. In commodities, gold slipped 0.1% to $2,567 per ounce after retreating from an all-time high. Crude oil prices also declined, with Brent crude futures down 49 cents to $73.21 a barrel and US crude futures sliding 50 cents to $70.69.

Analysts pointed to worries about oil demand, as money managers shifted to a net negative position for the first time since 2011. The anticipated interest rate cuts from the Fed could stimulate US fuel demand, further influencing the market. Meanwhile, violence in the Middle East raised supply disruption concerns, particularly after Hezbollah vowed retaliation following recent attacks.