We had a feeling yesterday that the Bank of England meeting would be overshadowed by something; turns out that it was probably the least important piece of tier 1 data released yesterday as first the Chinese, then the Fed Chairman Ben Bernanke and the ratings agency Fitch all clamoured for attention. The end result is a market that once again has started to fear its own shadow and overnight losses in Asia have been large.
To start with the Bank of England (if only to get it out of the way) those of you who attended the webinar yesterday will have heard me talk about the recent central bank decisions will know that we still expect some form of further easing from the Bank, possibly as soon as next month, but for the moment they are minded to sit on their hands. The minutes of the meeting will be released in a fortnight and we expect a lively debate as to the need and efficacy of further asset purchases and just how badly the UK economy is performing.
As we saw yesterday in the May Services PMI number, there is a significant disconnect between strong surveys from purchasing managers and the official government numbers. The bank is waiting for some clarification on the state of the UK and Eurozone economies before stepping up to the plate.
The People’s Bank of China however, seems to have seen enough and not 30secs before the Bank of England announced their decision to hold rates, the Chinese cut interest rates by 25bps; the first interest rate cut since 2008. There is a slew of Chinese data due over the weekend (retail sales, inflation and industrial production) and if we put our cynical hats on we have to think; Do the PBoC know that these figures are going to be poor? The longer running concern is that the Chinese economy is heading towards a hard landing through the 2nd half of the year; an economic slip that would rival Europe’s issues. The announcement prompted some buying of risk as traders bet on some form of global coordinated action but Ben Bernanke put paid to that.
The Fed Chairman also disappointed the stimulus junkies by stating that the Fed “stood ready to act” but declined to offer any explicit details of what could be done. His testimony was the most watched thing in markets yesterday and his steadfast refusal to talk further about additional QE turned the markets around heavily with the dollar once again strong and the euro being pressured lower.
It seems rare to get this far through an update and not have talked about Europe in some form or the other but yesterday was a fairly quiet day in crisis terms. Spain’s bond auction went well considering the government had moaned at the beginning of the week that they were cut off from funding markets. Demand was strong although it is fair to say that a large majority of the interest came from Spanish banks looking for collateral to lodge with the ECB in exchange for liquidity although the rating of that collateral was dealt a blow yesterday by Fitch.
The French company, which had earlier in the day warned the US about its credit rating should fiscal reform not be forthcoming, cut Spain’s sovereign rating from A to BBB; one level above junk. Spain’s bonds have opened weaker this morning, following the lead from Asian equities overnight. The general tone is for further losses in risk through the day as well.
Indicative Rates Sell Buy
GBPEUR 1.2340 1.2370
GBPUSD 1.5421 1.5446
EURUSD 1.2481 1.2504
GBPJPY 122.28 122.55
GBPAUD 1.5645 1.5672
GBPNZD 2.0183 2.0212
GBPCAD 1.5924 1.5953
NZDUSD 0.7633 0.7653
GBPZAR 13.00 13.05
USDZAR 8.4260 8.4595
GBPPLN 5.2959 5.3229
EURJPY 98.96 99.23
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