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 Thursday 04 August 2016

AM Bulletin: BoE rate decision in focus

 

 

Indices Update

All eyes are on the Bank of England’s (BoE) Monetary Policy Committee (MPC) meeting which takes place this morning. The MPC held off from taking any action at its last meeting back in July, preferring to wait for further clues on the UK’s post-Brexit economic situation. Since then we’ve had some decent employment data with an encouraging second quarter GDP reading. However, these are backward-looking data points and the news from the more up-to-date PMI surveys has been less optimistic.

Just this week we’ve had confirmation that the three main UK economic sectors (Manufacturing, Services and Construction) have all contracted with the deterioration in manufacturing over the past fortnight particularly noteworthy. Consequently, the consensus expectation is that the MPC will cut its headline Bank Rate (probably by 25 basis points) and may even add to its £375 billion Asset Purchase Facility. However, there’s no consensus over the latter with predictions ranging from “no change” to a £200 billion increase.

There are a significant number of commentators who see little to be gained in taking the headline Bank Rate down to 0.25% from the 0.50% where it’s been since March 2009. However, the Bank has really talked itself into a corner on this one and a failure to act now would blow its credibility.

Yesterday Japanese PM Shinzo Abe gave a press conference in which he said the government’s priority was the economy and it would do its utmost to beat deflation. He went on to say that he trusts Haruhiko Kuroda as Bank of Japan (BOJ) Governor and that it was up to the BOJ to decide monetary policy to which there were no limits. The Japanese yen weakened slightly after the USDJPY briefly broke below 101.00.

The FTSE 100 index closed down 11 points, or 0.17%, to end the day at 6,634.4

The German DAX rose 25.9 points or 0.26% to end the day at 10,170.2

The US30 closed up 41.2 points to finish at 18,355. The S&P 500 rose 0.3% to close at 2,163.8 while the Nasdaq 100 finished 0.3% higher at 4,734.3

Equities

HSBC reported first-half pre-tax profit of $9.71 billion, down nearly 29% from $13.62 billion for the same period last year. This was a touch below the $10 billion consensus expectation. Revenue for the same period was down 4% at $27.86 billion. Despite this there was a sharp rally in the shares after the bank announced it would conduct a share buy-back of up to $2.5 billion in the second half of 2016, and that it would sustain its annual dividend at the current level for "the foreseeable future." HSBC ended the London session 4.47% higher at 504.4 pence.

Commodities Update

Once again, Brent and WTI showed signs of stabilising in early trade yesterday and spent most of the European session trading in positive territory. Brent broke back above $42 per barrel while WTI was knocking up against its old support of $40. But both contracts slumped mid-afternoon following the latest update on US inventories from the Energy Information Administration (EIA). The headline number showed a build in crude of 1.4 million barrels against an expectation of a drawdown of 1.6 million. While there were drawdowns at the Cushing, Oklahoma hub and in gasoline stocks (which have been building recently) there was also a large increase in distillate stockpiles. Put together the data led to a 70 cent sell-off in Brent and the loss of a full dollar in WTI in less than a minute. Yet both contracts subsequently soared higher making back all their losses and more. The recovery came as the EIA also reported a slowdown in US production for the week ending 29th July.

Yesterday’s volatility demonstrated just how nervous oil traders are currently. It also showed how speculative the oil market is. Crude still exerts a strong influence over equity markets. The worry is that if oil continues to fall and gets stuck below $40 per barrel then we could see a wave of defaults hitting US shale oil companies and the financial institutions that extended them credit back when crude was trading above $80 per barrel. The current bounce-back has taken some pressure off equity markets. But if this turns out to be a brief bout of short-side profit-taking the sell-off in oil and other risk assets could soon continue.

Precious metals were modestly firmer in early trade yesterday, but subsequently lost ground as the US dollar rallied. A stronger dollar makes gold more expensive for foreign currency holders. Also, while European stock indices ended the session mixed, US equities began to head higher mid-afternoon. This encouraged investors to trim back their long-side exposure to precious metals, no doubt booking decent profits given their recent gains.

Gold and silver are sharply lower again this morning with silver bearing the brunt of the sell-off. Again, this is tied into the dollar’s rally and the resumption of the general “risk-on” trade which is tied into the oil price.

Forex Update

The US dollar managed to rally yesterday, partially reversing Tuesday’s decline. The EURUSD fell back below 1.1200 following the latest US ADP payroll release. Data for July showed jobs growth of 179,000 up from 172,000 the month before. This was good news as far as investors were concerned, but it doesn’t necessarily mean that we’re set for a strong Non-Farm Payroll number on Friday. Analysts are generally wary of taking the ADP data as a heads-up for Non-Farm Payrolls as the latter tends to be much more volatile than the ADP release. This has certainly been the case over the last few months. But the other issue is that the next Fed meeting isn’t until 20/21st September. Not only will July’s employment data be old news by then, but the market already doubts that the Fed will tighten monetary policy this year, let alone ahead of November’s presidential Election.

The British pound has had mixed fortunes ahead of today’s Bank of England rate decision meeting and quarterly inflation report. The consensus view is that we get a 25 basis point cut. This follows on from BoE Governor Mark Carney’s 30th June speech which put the markets on alert for easing “over the summer” but cautioned against rates being too low. Mr Carney said: "As we have seen elsewhere, if interest rates are too low (or negative), the hit to bank profitability could perversely reduce credit availability or even increase its overall price.”

Then attention turns to the Asset Purchase Facility which has been held at £375 billion for four years now. Unfortunately there’s no consensus here. There’s speculation that the MPC could leave it unchanged or raise it by £200 billion. It’s a difficult one to play, so I’m going to assume that a 25 basis point cut is already priced in, along with £50-100 billion of additional QE. If we get a cut and no QE then I’d expect sterling to rally hard while a cut (0.25%, or even 0.50%) and £200 billion of QE should see the pound come under sustained downside pressure. But this really simplifies the possible outcomes as the Bank also releases its quarterly inflation outlook. Any suggestion that the Bank sees a recession in the near future could drive sterling down below its post-Brexit lows.

Upcoming events

Today’s main event is the Bank of England’s MPC decision on interest rates and possible changes to its Asset Purchase Facility. The Bank will also release its Quarterly Inflation Report and Governor Carney and other MPC members will then hold a press conference to discuss its contents and implications. From the US we have Challenger Job Cuts, Weekly Jobless Claims and Factory Orders. 

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: AM Bulletin

Category: AM Bulletin


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