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The reasons to keep buying into the equity rally have either disappeared or lessened in importance over the past week and this is finally making itself felt. For Europe the big worry is that Friday’s dose of GDP and unemployment data will fail to live up to the mark, and while the US still managed a positive close last night there doesn’t seem to be much enthusiasm behind the buying.
The banking sector has taken a hit this morning as investors wearily start to price in the potential implications of the FX-rigging scandal. Today’s co-ordinated action is just the beginning for the sector, as the US Department of Justice takes an interest. Given how long the Libor and PPI scandals have been running, the FX story is going to be with us for an extended stay.
Although the UK’s unemployment rate refused to budge from 6%, the rise in earnings growth, which was ahead of inflation in September, if only just, gave the pound a lift. However, gains in the currency pair will be held back as traders await the main event, the Bank of England inflation report, which could strike a more dovish tone.
US futures are starting to trim gains, with 2040 still proving to be a real barrier for the S&P 500. Federal Open Market Committee member Charles Plosser has already been on the wires this morning quoting the usual line about a sooner-than-expected rate hike, but ruffled nerves could be soothed this afternoon as dissenting dove Narayana Kocherlakota speaks at 5pm (London time). Technical indicators still point to a market that is overbought and looking to pause for breath, with the quieter mid-November period providing an ideal time for a brief consolidation.
Ahead of the open, we expect the Dow Jones to start around 45 points lower, at 17,570.