Updated 12.45
The Bank of England left interest rates on hold at the record low 0.1 per cent and increased the size of its asset purchase programme by £100bn to £745bn. Although largely in line with expectations, the expansion of the QE programme was a little less than some of us had anticipated, and indeed was really the bare minimum to satisfy the market. The BoE said it stands ready to increase QE if required – it may need to this autumn. The Old Lady could have been a little bit braver here and expanded the envelope more.
The Bank said it can conduct asset purchases at a slower pace, and that the programme would be completed by the end of the year, which seems to be taken as a positive for sterling as it implies a degree of hawkishness vs expectations. The lack of any chatter about negative rates also lifted the pound off its lows. But by send time cable was still close to the LOD again – there is a degree of calm about the BoE that is slightly at odds with its major peers like the Fed and ECB. The MPC appears a little too relaxed about all this.
Gilt yields moved higher and sterling rose off the lows. 2yr gilt yields spiked, turning positive at one stage having traded around -0.075% ahead of the announcement. GBPUSD dropped to the lows of the day ahead of the announcement but bounced off lows around 1.2475 to touch 1.2550 before paring gains a little. Cable remains stuck within the recent range between 1.2450 (the 50 per cent retracement of the bottom-to-top rally from the May low to the Jun high.) and the 200-day moving average just above 1.2690 that sparked the run lower since Tuesday.
On inflation, the MPC noted that while the decline in oil prices has been very important in the drop in headline CPI figures, a ‘sharp drop in domestic activity is also adding to downward pressure on inflation’. As a result, inflation is expected to fall further below the 2 per cent target in the coming quarters, largely reflecting the weakness in domestic demand.
On the economy, the MPC thinks the downturn in the second quarter will be less severe than it estimated in May. However, we know that the initial rebound is the easy bit; getting back on the previous trend takes a lot longer.
In particular the Bank seems to be very aware of labour market stress, noting that ‘there is a risk of higher and more persistent unemployment’... and that the ‘economy, and especially the labour market, will therefore take some time to recover towards its previous path’. The Bank will need to cope with a significant increase in unemployment as the year progresses and will require to take more aggressive action.
9.30am
Central banks should be marshalled as you would cavalry, and stimulus like charges. If your stimulus doesn’t rout the enemy immediately, you can easily get bogged down in a melee in which you lose your advantage. The Federal Reserve keeps wheeling around and managing to rally troops for fresh charges – the corporate bond buying announcement this week was a fine example. But increasingly the cavalry is wearying and the more this drags on the less impact the Fed’s repeated charges will have against the twin enemies of deflation and unemployment. Investors are clinging on to central bank stimulus like the Gordon Highlanders gripped the stirrups of the Scots Greys, as they rode down the French columns at Waterloo.
The Bank of England will mount a fresh charge at the enemy formations today. Coordination is the name of the game: it needs to keep on top of the huge amount of issuance – borrowing – by the UK government. Wartime levels of debt means the BoE must expand the envelope to hoover it up or risk yields starting to rise and spreads widening.
So, the BoE is expected to increase QE by at least £100bn, but I think it may well opt for £200bn, or even more, given that even £100bn would only last it until the end of the summer and the real long-term economic problems are going to emerge later in the autumn. Interest rates will stay at 0.1 per cent and expectations firmly anchored for the near future with forward guidance repeating that the Bank will do whatever it takes. In order to achieve this, the government and central bank will need to coordinate throwing more money at the problem. Indications suggest furlough has been costly but only delayed a lot of the pain – a looming unemployment crisis will require further central bank support, which means more QE is likely. And don’t talk about negative interest rates – Andrew Bailey mentioned it once, but I think he got away with it. Once you go negative, it’s very hard to get back to normal. Whilst fresh forecasts are not due until August, the Bank will likely set a more defensive tone in terms of its expectations for the recovery. As noted here on May 7th (BoE: for illustrative purposes only) the Bank’s assumptions on economic recovery seem rather optimistic. Read Chris Dillow's thoughts on the liquidity driven rally and why we should not fear it.
Sterling was steady ahead of the decision. GBPUSD held around the middle of its trading range, sitting on the 38.2 per cent retracement of the bottom-to-top rally from the May low to the Jun high. Monday’s test of the 1.2450 (50 per cent level) remains the support whilst the upside seems well guarded by the 200-day moving average just above 1.2690 that sparked the run lower since Tuesday.
Wall Street stocks fell yesterday, except for tech, whilst European markets are on the back foot this morning as investors parse new cases in the US and China. The bulls lost energy as new hospitalisations in Texas due to Covid-19 rose 11 per cent in the space of 24hrs. Several other US states are seeing rising cases that are a worry, albeit the kind of mass lockdown seen earlier this year appears an unlikely course of action. The economic damage is too high, and we are generally better equipped to handle it. Worries about China are also important – markets had largely not bet on a second lockdown in the world’s second largest economy.
Overall, the market swings now suggest investors are reacting to various headlines about recovery, stimulus and new cases without much clear direction as to what it all means as a bigger picture. The major indices are right in the middle of recent trading ranges, sitting around the 50-60 per cent retracements of the move from the multi-month highs at the start of last week to the swing lows this week.
UK Company Announcements
| Company | Announcement |
| Blue Prism (PRSM) | Revenue grew by 70 per cent in the six months ended in April, driven in part by new customer sales and upsells. The software group said it plans to reach cash break-even in 2021. |
| Tesco (TSCO) | Tesco has agreed the sale of its Polish business to the Danish Salling Group for £181m, in a deal that is expected to be completed in the current financial year. |
| Superdry (SDRY) | The retailer has exited its Chinese joint venture with Trendy International, which was formed in 2016. Owned retail stores will close by the end of August while franchise partners will sever ties by the end of the year. |
| Ted Baker (TED) | Ted Baker has raised £105m in new equity, via an open offer and an offer for subscription. |
| Taylor Wimpey (TW.) | The housebuilder has raised £522m via a share placing, alongside a retail offer, issuing new shares priced at 151.8p, a 4 per cent discount to yesterday's closing share price. The funds will be used to invest in cut-price land, which has come down in value from pre-Covid 19 levels alongside house prices. |
| Warehouse Reit (WHR) | After parking its fundrasing plans following the pandemic outbreak, the group has announced plans to raise £175m via a share placing and open offer, under which shareholders would recieve one new share for every three they hold. The shares will be priced at 110p, a 0.5 per cent discount to last night's closing price. A prospectus will be released later today. The landlord group has been one of the few to maintain its dividend target. |
| CareTech (CTH) | Half-year numbers to March were in line with market expectations. Net debt contracted from £293m to £287m, and the dividend has been raised slightly. The social care services provider expects to meet full-year forecasts. |
| NewRiver Reit (NRR) | A sharp devaluation in the value of ther group's retail property portfolio meant pre-tax losses surged to £121m last year and estimated rental values dropped 5.5 per cent on a like-for-like basis. We continue to think income prospects remain dimmed. |
| Novacyt (NCYT) | The diagnostics specialist has unveiled three new products to support lab testing for Covid-19. |
| National Grid (NG.) | The final dividend has been increased to 32p, growing the annual payout in line with RPI inflation to 47.34p for the year to 31 March. The group is guiding to a £400m blow to underlying operating profit and £1bn hit to cash flow this year from Covid-19. Although this should be recoverable in future years under regulatory mechanisms. |
| BP (BP.) | Using a bond-equity hybrid, the oil and gas giant has raised $12bn (£9.6bn) in new debt. This comes just after BP flagged a $13-17.5bn writedown on its assets at the end of the quarter. |
| Prudential (PRU) | Shares are well up this morning after the life insurer inked a major reinsurance deal with Athene. The New York-listed counterparty has also taken an 11 per cent stake in Prudential's US subsidiary Jackson, setting a $4.5bn (£3.6bn) valuation ahead of a proposed IPO. |
Elsewhere, the US pulled out of talks with Europe over a global digital services tax, which raises the risk of individual countries taking their own steps, in turn sparking a fresh wave of US-EU tensions. An escalation of dormant trade wars is not out of the question if EU nations and the UK decide to tax US tech giants aggressively. This comes of course after the EU launched an anti-trust probe into Amazon. Read Mark Robinson's news analysis of this move against the online retail behemoth. In Europe, Germany passed additional fiscal stimulus to combat the pandemic costs. This morning Angela Merkel called on the EU to agree to the Covid fund before the summer break.
Crude prices were steady as they hold within the consolidation pattern printed since the start of June. WTI for August was holding around the $38 marker after the EIA inventories rose 1.2m barrels, vs expectations for a draw. This matched the API data (+3.9m) and suggests there are more supply-side pressures at present, but OPEC data indicated demand not falling as much as previously expected in the second half of the year. Meanwhile it seems Iraq is working its way towards complying with OPEC+ cuts.
Neil Wilson is chief markets analyst at Markets.com
