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Stocks have opened higher again after Europe rallied handsomely on Tuesday with gains of +1%. Wall Street was more timid – the S&P 500 declined marginally, as did the Dow Jones industrial average. The Nasdaq and Russell 200 both eked out small gains. Shakeout from Monday seems to be lingering longer in the US – there was an attempted bounce yesterday but failure to finish above the previous close is perhaps a signal that there is further weakness in the offing. However, it’s hard to take too much risk on with attention now squarely on today’s FOMC statement and press conference with Jay Powell.

Whilst markets do not expect the Federal Reserve to race towards tapering asset purchases – the soft jobs report did for that – there is a broad consensus in the market that it will begin dialling back the pace of its QE programme at some point this year – likely Nov, but maybe Dec. That means this week’s meeting may be an appropriate moment for the Fed to give the market fair warning. Or not. In a sense it doesn’t matter much what they say or don’t say on tapering – the risk lies in what the Fed does or doesn’t say about rate hikes. And though Monday’s market sell off may have caught the Fed off guard, with stocks just 4% off record highs there is not any reason for panic right now. Stocks have been rolling over since the weak jobs report, and Fed officials should be prepared to look through some softer data and mild pullbacks in equity markets. I don’t think the Fed is actually worried about the S&P 500 dropping 4-5%, despite what some of the fintwit crowd suggest.

The main hawkish risk for the market is with the dot plot – if you still pay attention to it. The market does, at least for a time. A hawkish dot plot bringing lift-off into 2022 could be a sell signal. Also watch inflation forecasts. Inflation is going to be higher for longer and the Fed is starting to realise this. Close attention will be paid the latest round of economic projections for a guide on whether the Fed is changing its mind on the pace of inflation and growth. My own view is that we get a Fed that is more ready to accept – at least in the projections and dots, if not Powell’s words – that inflation is stickier than they thought it would be. Core PCE forecast at 3% in 2021 needs to revised higher but the big one will be the outlook for 2022 and 2023, which at the Jun meeting were forecast at 2.1%. My bet is the Fed raises 2021 to 3.5%, 2022 to about 2.5% and leaves 2023 alone, pulling a ‘it’s transitory but not quite as transitory as we thought’ angle. My own view: the Fed’s policy response to the pandemic and failure to pullback emergency support sooner has allowed long-term inflation expectations to become unanchored, creating damaging effects on confidence and growth longer-term: stagflation.

Noteworthy that the OECD came out yesterday to say inflation will grow faster than before the pandemic for at least two years. G20 inflation will fall from 4.5% at the end of 2021 to 3.5% by the end of 2022, the OECD said.

Shares of Evergrande in Frankfurt are surging this morning after the company struck a debt deal over a repayment due Thursday. The EV1 ticker rallied 20% in early trade to €0.32. China’s central bank was also stepping up liquidity injections, adding to the improved risk sentiment. The PBOC pumped 60 billion Yuan of 7-day reverse repos and the same again in 14-day reverse repos, though they stopped short of cutting the prime 1yr and 5yr loan rates. The mood boosted AUD and NZD and injected some bid for metals, with copper back above $4.20 having tested $4.0 yesterday. The fillip helped basic resources top the FTSE 100 in early trade this morning, with Anglo American, Antofagasta, BHP, Glencore and EVRAZ the top risers. Mega default contagion risk abated for the time being.

Entain shares soared higher as the company announced that it received an offer from DraftKings worth 2,800 pence per share. The offer would consist of 630p in cash and the balance payable in new DraftKings shares. Shares trade up 7% again to 2,432p, suggesting investors are not betting the farm on this deal going ahead. Entain says it will ‘carefully consider the proposal and a further announcement will be made as and when appropriate’. Consolidation in this space has been taking place for years over this side of the pond. Deregulation of the US sports betting market was always going to create further change as the technology and expertise of the British firms came to the fore – the question I have why are these takeovers not going in the other direction? Anyway, Flutter up 5% today because you know – who’s next and all that – but also it settled its case with the US state (Commonwealth) of Kentucky, agreeing to pay another $200m in addition to the $100m already forfeited.

Safety equipment maker Halma reports ‘strong progress’ in the first half of the financial year, with performance ahead of management expectations, with revenue growth and return on sales exceeding both expectations and historic levels. Order intake was better than the 2019 period. Halma cautions that it expects to see more typical rates of revenue growth and return on sales in the second half of the year, with the latter more in line with historic levels as variable overhead costs gradually return. In addition, management warn they will see continued impact on revenue, costs and working capital from increased supply chain, logistics and labour market disruption. Despite this, adjusted profit before tax for the full year is expected to be slightly ahead of previous guidance.

Oil rose, as near-term weakness in prices caught in the broader risk sell-off waned, allowing firmer price action to take over. Goldman Sachs said that combined with the spike global gas prices, a colder winter in Europe and Asia could drive demand for crude and $5 a barrel to the price of oil. API data showed a draw of more than 6m barrels last week, well above the 2.4m expected. EIA figs today expected to show a draw of 3.3m barrels, which would be the 7th straight weekly decline in inventories with the disruption from hurricane season still playing out on the ground. Momentum just cooling a touch on the daily charts but market fundamentals still look very good.

Elsewhere, the dollar is flattish this morning. GBPUSD is testing month lows again around 1.3640 – potential bottoming taking place – key test here whether we break these trend lines on the price and also the RSI and MACD (green). A bounce calls for a rally back to 1.390 perhaps – beware tonight’s Fed meeting for headfakes.

GBPUSD Chart 22.09.2021

A new low for Bitcoin overnight, weakest since early Aug. Price action is wobbly and may see the Jul lows around $30k unless the 200-day is recaptured soon.

Bitcoin Chart 22.09.2021

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