The Bank of England fired its big bazooka today with a 50bps cut to rates – this is the ‘whatever it takes’ moment. The move takes the Bank base rate back to its all-tome low at 0.25 per cent. The rate cut has come alongside a new term funding scheme for SMEs and reduction of banks’ capital buffers that the BoE reckons will be worth £290bn in extra funding. The key question is whether banks will simply lend more?
While many rightly doubt the efficacy of monetary policy in this environment, we think that the BoE has done two things right: It’s made the rate cut only a part of a package of measures designed to incentivise lending to businesses; and it’s done it in tight coordination with the Treasury, which will launch a bold new spending programme to bolster the economy today. This is the best way to maximise the impact of the cut.
The move seems to have been preceded by a weakening in sterling yesterday and GBP took a leg lower on the announcement. GBPUSD has retraced that in fairly short order and moved back to 1.29 and then driven up from this level 1.2940.
Next up is the Budget. The coronavirus crisis will overshadow new chancellor of the exchequer Rishi Sunak’s first Budget address. Whilst the economic surveys at the start of the year were encouraging, the coronavirus has cast a pall over the economic outlook since then and it will force this great set-piece of the new Tory government into being something of a footnote in the story of the financial market chaos sparked by the coronavirus and collapse in oil prices.
Then the focus turns to the ECB and Europe. Christine Lagarde said today that Europe faces a 2008 type shock and is looking at all policy tools. Yesterday Germany’s Angela Merkel said the crisis does not need ‘classic stimulus’ but liquidity to counter the coronavirus impact. Lagarde will need to use all her skills to lean on Ms Merkel. While Europe appears to drag its heels, Britain is acting fast and hard; it’s the right response and could help the UK enjoy a shallower downturn as a result of the virus, which could support UK assets.
Meanwhile, equity markets remain very volatile. Asian shares have been battered again overnight. European markets tried so hard to rally yesterday but limped into the finish but have rallied this morning, trading +1 per cent in the first hour of trading. The FTSE dropped more than 4 per cent off its highs mid-morning yesterday to finish just in the red – it was a rather brutal bout of selling after an initial dose of optimism. As I suggested, it smelled liked a dead cat. US futures are signalling a decent drop again after a late session rally yesterday.
Oil is holding gains despite some the war drums. Saudi Arabia launched a price war over the weekend and are now embarking on a supply war. Aramco said it would up output in April to 12.3m bpd, from 9.7m in March. The partially-listed company now says the government has asked it to raise its maximum capacity to 13m bpd.
It’s going to be negative for prices and could produce WTI and Brent in the $20s once this all comes out in the wash. Turning the taps on in this environment when demand is so uncertain is clearly ultra-bearish for crude pricing. The collapse has produced a massive contango spread that’s not been this wide in years. It’s a dire situation for oil markets and the only hope is that Russia and Saudi Arabia come to terms. The reason crude prices haven’t fallen further is because the market seems to think neither side will want this to last. However, neither is willing to back down.
Equities
Budget day is always a fun one and worth keeping an eye on some individual sectors.
There is going to be more spending and more borrowing. Indeed, under Sunak, the Treasury is very much an arm of Number 10 and the restraint Javid had wanted to show will be cast aside. It will be the death knell for austerity. This should benefit gilt yields, which recently struck all-time lows, and could also help lift sterling. In terms of stocks, UK bank shares including Lloyds and Barclays would be most exposed to any movement on spending and borrowing affect the yield curve.
Business rates – Tesco and other major retailers like Sainsbury’s and WM Morrison could be in for a boost should the chancellor cut business rates. Tesco pays in excess of £700m in business rates each year, so any cut to this levy could have a material impact on the company’s bottom line. We would also consider looking at pubs & restaurants such as Greene King, JD Wetherspoon and Restaurant Group as likely beneficiaries from any reforms.
This could also be a boost to REITs if it can support retail values. As noted in November, the REITS are facing a war on the high street. After Land Securities warned about CVAs dragging it into the red, British Land also said it felt the pinch from a struggling retail market after writing down the value of its by £600m in the last 6 months. The company wrote down the value of its portfolio by 4.3 per cent to £11.7bn from £12.3bn as of March. But within this Retail values slumped 10.7 per cent, whilst Offices rose 0.4 per cent. Intu, which has just abandoned a cash raise, is arguably beyond redemption with a debt-for-equity swap likely and making it off-limits for many.
House building – The Conservatives want to level up and part of that promise means creating more homes for younger aspiring homeowners. Each new government promises to deliver on housebuilding but never quite does it. Nevertheless, the chancellor could have some measures up his sleeve. Help to Buy is slated to end in 2023 – I'm not sure this government will extend it, but you never know.
Housebuilders like Barratt Developments and Taylor Wimpey are the bellwethers but building merchants like Howden Joinery are the ones to watch here. Indeed, the latter may be offer more stable exposure to UK construction markets.
Neil Wilson is chief markets analyst at Markets.com
