Mark Carney and the Bank of England pulled out the monetary bazooka last night as they try to get in front of what is becoming a spiral in the UK economy.
The initial reaction is that it just might work with the pound and UK bond rates lower while the FTSE rallied.
Elsewhere though, traders are waiting for the release of non-farm payrolls tonight. So US stocks are largely unchanged while local futures traders are betting on a slightly better day again in Australia with SPI futures up 12 points.
On currency markets, apart from the move in the pound, the big news is the strength of the Aussie dollar, while on commodity markets, crude oil’s rally continued.
Here’s the scoreboard (6.14am):
- Dow: 18352 -3 (-0.02%)
- S&P 500: 2164 +1 (+0.02%)
- SPI 200 Futures (September): 5,446, +12 (+0.2%)
- AUDUSD: 0.7626 +41 (+0.5%)
The top stories
1. Mark Carney has done it. He delivered the perfect package to restore confidence in the British economy after Brexit. Mark Carney made his reputation as Bank of Canada governor during the GFC. At that time he slashed Canadian rates with such force and speed that Canada was able to evade the worst economic aspects of the global financial crisis.
Fast forward eight years and he’s gone back to his BoC playbook delivering a package which includes a rate cut, quantitative easing, and other measures such as leverage ratio adjustments which get him in front of what was becoming a worrying spiral in UK economic confidence and the economy.
2. One of the Bank of England’s measures supports Australian bank claims they can’t pass on all of this week’s RBA rate cut. As a central bank trying to stimulate the economy, the Bank of England, like the RBA this week, wants lenders to pass on the full benefit of the rate cut to borrowers. But that’s not easy, the BoE said, when rates are low:
The cut in the Bank Rate will lower borrowing costs for households and businesses. However, as interest rates are close to zero, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn might limit their ability to cut their lending rates.
This is likely to be part of the defence of Australia’s Big Four when they get hauled before parliament to explain their actions.
Another part of their defence might be that wholesale borrowing rates haven’t come down as much as the cash rate. So the Bank of England has a solution – and it’s a great idea:
“The MPC is launching a Term Funding Scheme (TFS) that will provide funding for banks at interest rates close to Bank Rate. This monetary policy action should help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that households and firms benefit from the MPC’s action.”
Cue the RBA if it feels the need to lower rates further from 1.5%.
3. The Aussie dollar is defying everyone again – here’s the level traders are watching. The Aussie dollar is the best performing of the G10 currencies overnight. It’s up 0.5% at 0.7627 testing again the top of the current wedge formation technical traders are watching.
Yesterday David Scutt published his wrap of the CBA’s note highlighting 8 reasons why the Australian dollar didn’t fall after the RBA cut rates. So the Aussie remains bid and if it breaks, chartists might pile in driving the Aussie higher still.
Here’s the chart from my Reuters Eikon terminal.
4. Here’s another warning that the recent stock market rally is going to fall apart. Bob Bryan reports that Jonathan Gilonna, head of US equity strategy research at Barclays, published a note overnight arguing that while the recent stock surge has come on the back of strong economic data, it is not enough to push the market higher over the long-term.
He’s looked at three previous late-stage rallies since 1980 — 1988 to 1989, 1998 to 1999, and 2006 to 2007 — and identified three conditions that are needed to make them sustainable. You guessed it – he reckons those three conditions are absent now. Bob has more here.
5. Here’s everything you need to know about Friday’s jobs report. As usual, the first Friday of the month comes with the release of non-farm payrolls. It hangs over the market like the Sword of Damocles. That’s a point Jim Davis, regional investment manager at the Private Client Reserve of US Bank which oversees $128 billion, told Bloomberg overnight. Davis said: “Tomorrow’s employment number is the catalyst for the market. That’s what is going to rule the pricing trends over the next few weeks…We really need to see some economic growth in order to have more assurance that we’re going to have growing earnings in the second half of the year.”
It’s a huge number and here is Akin Oyedele’s excellent primer with all you need to know about tonight’s release.
6.Last week’s Devils and Details podcast changed my view on the chance of an RBA rate cut – here’s the latest one looking at Bill Gross’ 5 big questions. The BI podcast is the number one locally made business podcast in Australia. That’s because Paul Colgan and David Scutt get engaging guests to talk about important topics.
As I’ve written this week, Jo Masters from the ANZ’s view on the RBA changed my thinking about a rate cut. This week’s discussion is with AMP’s Shane Oilver and the team talks about the RBA, the Aussie dollar, bank funding costs and Bill Gross’ big 5 questions for markets.
Key data for the past 24 hours (with thanks to BNZ markets)
AU: Retail sales (m/m%), Jun: 0.1 vs. 0.3 exp.
AU: Real retail sales (q/q%), Q2: 0.4 vs. 0.5 exp.
UK: Bank of England bank rate (%): 0.25 vs. 0.25 exp.
UK: BoE asset purchase target (£bn): 435 vs. 375 exp.
US: Factory orders (m/m%), Jun: -1.5 vs. -1.9 exp.
And now from CMC Markets’ Michael McCarthy is today’s Stock of the Day
Bank Bashing and CBA
Unfortunately for investors, banks have become a lightning rod for all the economic disaffection of average Australians (read; those not involved in the finance industry). Whether it’s job losses in manufacturing or a lack of pay rises in retail, in the popular imagination these woes are somehow caused by those b….y banks.
Naturally, this makes the banks a popular political target. The calls for a Royal Commission into the industry during the recent election campaign are a case in point. Despite no-one ever spelling out what question an RC would answer, it seemed a vote winner.
So has the PM’s move short circuited these threats to the financial well-being of the sector? This was the topic of a “trader strategy session” late last night. The two views were a) no – the threat is increasing and yesterday’s announcement was a capitulation to internal LNP pressure , with more to come and b) yes – the banks have a good case to make and a public forum will help explain their actions to average Australians.
The case was not won overnight. For more answers, we turn to the primary evidence – the price action. The chart shows the sell-off following the announcement brings CBA to a 38.2% retracement of the recent rally. Further falls from here will favour the “no” vote, a rally the “yes”.
Michael McCarthy, chief market analyst, CMC Markets.
You can follow Michael on Twitter @MMccarthy_CMC