LONDON: Sterling surged and world shares stopped in their tracks having hit an eight-month high on Thursday, as the Bank of England unexpectedly opted to keep its post-Brexit powder dry for at least few more weeks.
Talk of more stimulus from Japan had put markets in a bullish mood ahead of what had been tipped as the BoE’s first interest rate cut since 2009. So its decision to hold off, although probably only until August, stalled the momentum.
European stocks trimmed some of their day’s gains. London’s FTSE went from being up 0.8 per cent to flat within minutes as sterling ramped up 1.8 per cent and 1.3 per cent against the dollar and the euro respectively.
That put the pound on course for its best week since 2009 while British government bonds were ditched as investors betting on a shock-and-awe strategy from BoE chief Mark Carney began to retreat.
“There’s going to be a bit of disappointment in financial markets. They had taken Carney’s earlier comments about easier monetary policy to heart, said Aberdeen Asset Management economist Paul Diggle.
“But the next meeting is only three weeks away, and by then Carney and his colleagues will have a few extra post-referendum data points to digest as well as a new set of forecasts so the market should get its way then.” Sterling rose as high as $1.3480, up more than 2 per cent, before easing, while the euro climbed to a nine-day high of $1.1165 as traders began to trim their expectations of further ECB stimulus this year.
The S&P 500 and the Dow touched record highs at the open on Thursday, boosted by JPMorgan’s strong results, which set an upbeat mood for big banks earnings and spurred a rally in financial stocks. Wall Street’s record-setting rally extended to the fourth day, even as the Bank of England surprised investors by leaving interest rates unchanged at 0.50 per cent. But, investors saw hope after the central bank signalled there would be a stimulus program in August, once the impact of Britain’s decision to leave the European Union had been assessed.
The potential for BOE action next month, which investors believe could set off another round of global central bank- and government-led stimulus, meant broader markets were not too be pushed off course.
MSCI’s 46-country All World index was barely budged from an eight-month high it had hit in early European trading and Wall Street was set to add around 0.6 per cent to Wednesday’s latest record high.
In the currency market, the pound wasn’t the only big mover.
The yen fell to 105.67 yen per dollar down 4 per cent since the start of the week, which if it holds will be the sharpest drop since 1999 and the sixth biggest since the end of the Bretton Woods era over 40 years ago.
Helping fuel the move was a report that former US Federal Reserve Chairman Ben Bernanke had floated the idea of perpetual bonds with one of Prime Minister Shinzo Abe’s key advisers in April.
Abe called for fiscal stimulus, expected to reach about 2 per cent of GDP, following an upper house election victory that strengthened his grip on power on Sunday.
“We’ve heard a lot of talk about fiscal policy out of Japan.
Something will happen on that front. The big question is whether there will be further monetary easing and coordination of the two,” said Societe Generale’s Alvin Tan.
EMERGING SURGING
Emerging markets remained firmly on the front foot as they continued to benefit from the prospect of more cheap money from big central banks.
The benchmark emerging equities index was up for a sixth straight day to leave it up 9 per cent over the last two weeks. The average premium investors demand to hold emerging sovereign dollar bonds versus US Treasuries has also fallen to its lowest in over a year.
“This is a yield-hungry environment and EM does stack up as an asset class that does offer yield,” said Steve Ellis, a portfolio manager at Fidelity International.
In developed bond markets, benchmark 10-year U.S
and German government debt yields rose around 3 basis points following a similar rise in British equivalents, which were up 4 bps at 0.79 per cent.
US-focused investors were waiting for weekly jobless claims data and speeches from Federal Reserve policymakers including centrist Dennis Lockhart.
Stocks watchers meanwhile were combing through earnings reports. JPMorgan’s quarterly profit beat expectations to send its shares up 2.5 per cent in premarket deals, with analysts also keen to hear what impact the bank expects Brexit to have.
