Out of the bag the Fed springs a nasty little surprise on virtually everyone (except our clients who had been selling in droves as soon as the FTSE broke above 5300!). In hindsight (a truly wonderful tool) we can see that there had been indications from Mr Bernanke last month that the discount rate might be due a move and so we should not have been so surprised. US growth is in the inflation worry range and this really does not sit with rates at 0.5pc and investors should start to calculate in significantly higher rates for their returns.

The equity markets will open lower but not significantly so and the net effect will probably only be the wiping out of yesterday’s rally and this is perfectly reasonably even in a higher interest rate environment.  Rates should move to reflect growth potential and (aside from the UK and Europe) this appears to be in robust health.  The real worries will be focussed on the nations that have huge budget deficits and limited room for manoeuvre on generating extra tax income. Unfortunately the UK springs to mind.  We are likely to see increased volatility over the next few days as dealers try to re-evaluate returns in the light of changed central bank policies

The FTSE is called at 5285 in pre market action some 40 pips off from the close yesterday dragged down by the moves overnight in the US and Asia.  There will no doubt be a hunt through the markets to identify companies most at risk of rising rates (i.e. those with high borrowing levels or those whose customers are similarly impacted). The retail sector will probably be one of the losers this morning as will builders, gold producers may also suffer as the Yellow Metal, in a rising interest rate environment, looks very, very exposed.  Winners much to everyone’s dismay, of course, will be the banks.

The S&P has given up the 1100 level having only busted through it in the last couple of sessions and 1105/1108 is now looking to be a really significant barrier to advancement having been the for the last four attempts to get higher (as we mentioned on Tuesday). As also mentioned a few sessions ago the 1090’s tend to be a price area that the S&P shoots through on the way somewhere else and bulls must be hoping that the pull back to the current 1095 is not the forerunner to another such event.

Currency markets though were the big, big movers last night with both the Euro and the Pound hitting new recent lows. Sterling broke through the really solid support of 1.3550 in a flash having satisfactorily bounced off it several times in yesterday’s session. The hope for the sterling longs will be that this level can be regained in quick time but as mentioned yesterday there is precious little volume or technical support between 1.5550 and 1.5000. Traders will be aware that currencies have a habit of moving in great swathes and the current momentum is definitely dollar positive. Versus the Yen the dollar did also move higher but in truth we have been oscillating between 93.00 and 88.00 for a while now so the current price of 91.90 can only be said to be close to recent highs rather than in any kind of break out pattern. Japan has surprised (to the upside) with its own GDP numbers in recent days so the impact of increased US activity is not so noticeable.

As mentioned one of the big losers overnight was Gold which had been looking like recovering some of its lost ground of recent times. The big four props for the Yellow Metal (low rates, weak dollar, inflation worries, and financial fears) have now lost two of these crutches and with equity markets looking reasonably stable and returns on Government bonds rising all the time the cost of holding long positions is increasing. Of course it will retain it ‘protection of last resort’ status but traders seem to be getting ever more wary of being caught long. Yesterday makes it the second day in a row where the post European session has lost 20 dollars or more and it does seem concerning that the Asian markets (where Gold is supposed to have its greatest attraction) seem to have suddenly lost their appetite.

Amidst all the flurry Oil has also started to look rather more dramatic with the last months activity showing increased daily ranges and sharp shifts between sudden bullishness and bearishness. Yesterday saw us close in on our old friend, the $80 level, with a high at 79.60. The markets have traded higher than this (in fact reaching $84 briefly in the first week of 2010 when everything was roaring up) but have consistently struggled to hold above the mark. We have seen selling above 79 last night and the price has pulled back to 78.25 this morning but bears should be concerned that oil seldom just rallies and then gives up. We normally have a couple of goes at least at the top end of ranges.