Sterling got slapped and equity markets got a boost last night after Bank of England Governor Mark Carney laid out the prospect of further interest rate reductions over the summer.
While this really wasn’t too much of a surprise it still managed to knock the pound down and helped turbo charge the FTSE100, which had already managed to recover over its post Brexit peaks to its highest level since August last year. It also helped pushed gilt yields even further down into record low territory below 0.9%, a far cry from the pre Brexit levels of 1.37%.
While the market reaction was no surprise the fact is that by and large this was confirmation to a large extent of what was already being priced in by the market. 10 year gilt yields were already below 1% prior to Carney’s comments, and this merely gave them an extra nudge lower. Furthermore the pound was already trading considerably lower than its pre Brexit lows of 1.4000 as well.
This move in long term yields would appear to suggest the prospect that the markets is pricing that rates could well fall to zero, or that the central bank embark on further expansion of its QE program, beyond the £375bn already done. As it is the 2 year gilt yield has already ventured in to negative territory in the wake of yesterday’s comments.
While a rate cut probably won’t come in July given the governors assertion that the MPC would assess situation at the July 14 meeting, further measures could well get implemented at the August meeting when the bank sets out its latest inflation report, along with revised growth forecasts where we are quite likely to see the 2016 forecast lowered sharply from the current 2%.
Yesterday we saw Q1 GDP confirmed at 0.4% and with Q2 likely to struggle to grow at all, its highly questionable that we would have got anywhere near 2%, whichever way last week’s vote went.
Mr Carney went on to reassure about the capital requirements of UK banks at a time when banks all over Europe are under pressure due to shrinking interest rate margins.
While the referendum outcome has no doubt dealt a blow to the UK’s economic confidence, data out thus far in Q2 had already pointed to a slowdown in economic activity, given that the global economy had already been showing signs of weakness in any case.
Even if we had voted “Remain” there is no guarantee that we wouldn’t have seen further monetary loosening, though the events of the past few days have made it much more likely.
A slowdown in China, the US and Europe on the manufacturing side had already pointed to a global manufacturing recession, with the only bright spots being on the services and consumer side, and even here we’ve seen activity slip back as well.
With economic data out today starting today with the latest manufacturing PMI’s from China, which once again has been weak, the Caixin survey slipping to 48.6, and the official measure to 50, and the latest Italian, Spanish, French, German and UK numbers later this morning the outlook for Q2 doesn’t look particularly promising anywhere in the world.
Spanish, Italian, French and German manufacturing PMI for June are expected to come in at 52.1, 52.3, 47.9 and 54.4, while UK manufacturing PMI is expected to round off a poor quarter at 50.1.
If next week’s services data is similarly weak it will likely reinforce concerns about further global economic weakness which means it is quite likely we could well see further attempts by global central banks to try and mitigate their own slowdowns which would suggest that the Bank of England won’t be alone in trying to keep a floor under economic activity in the coming months.
EURUSD – despite a move to 1.1155 the euro has slipped back as it oscillates directionless around the 200 day MA. This suggests we could get a move either way and keeps the prospect for a move towards the March lows at 1.0825 on the table. To stabilise we need to see a move back above the 1.1250 area.
GBPUSD – slid back sharply away from the 1.3530 dropping back below 1.3400 in the wake of Governor Carney’s comments yesterday. We need to hold above the 1.3120 level or risk a move towards 1.2800. To stabilise and mitigate the risk of a move below 1.3000 towards 1.2800 we need to see a move back through the 1.3650 area.
EURGBP – has found support at 0.8205 after sliding back from the 0.8370 area the 2014 highs as well as the 50% retracement of the move from the 2008 highs at 0.9802 to the 2015 lows at 0.6934. A move through 0.8370 could well see a move towards 0.8706. Key support comes in at 0.8120, and the April highs.
USDJPY – has managed to stay above the 100 level after rebounding from 98.95. We need to get back through the 103.50 area to retest the 105.50 area. A move below 100.00 is likely to prompt the risk of further losses and possible BoJ intervention concerns.
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