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Market News – 06 February 2017

The Bank of England kept its interest rate at a record low of 0.25% last Thursday. The Monetary Policy Committee (MPC) voted 9-0 against a stimulus increase. Governor Mark Carney warned that the ‘Brexit-journey’ has only just begun and warned that politicians are becoming more important to the global economy than central banks.

GBP

The Bank of England hiked the UK’s growth forecast for 2017 to 2% from 0.8% after last year’s referendum. The 2018 number was also increased from 1.5% to 1.6% – resilient growth post-Brexit being the foundation for the hikes. ”Domestic demand has been stronger than expected over the past few months and there have been relatively few signs of the slowdown in consumer spending that the committee had anticipated.

Theresa May released the governments ‘Brexit whitepaper’ last week. Tucked away in the final pages of the government’s 75-page plan for the Brexit negotiations was the line that the government would draft emergency laws to protect the economy in the event that the talks break down without the sweeping free trade deal May wants.

The government also warned of financial market disruption if banks can’t secure access to the EU.

EUR

The risk of the French presidential election in April is starting to be priced in to the Option market. Elections in France and also the Netherlands are giving leveraged buyout firms an incentive to sell their remaining stakes in companies they’ve previously taken public.

Over the coming weeks, lock-ups that stop the firms from reducing their holdings are set to expire, allowing many investors to de-risk and exit their European holdings.

TCW asset management, who run the world’s largest actively managed bond fund, has eliminated its exposure to Eurozone bank debt over fears these lenders are “excessively risky”. The amount of toxic loans held by European banks is of huge concern, with TCW reducing their exposure by 75%, with the remainder now held in UK banks.

Figures for business sentiment, growth rates and unemployment for the single currency area have all provided positive surprises during the start of this year, as business confidence proves resilient despite Britain’s vote to leave the EU.

The Eurozone economy has now posted 14 consecutive quarters of growth, the unemployment rate has returned into single digits and economic sentiment has reached its highest level in six years.

USD

Non-farm payrolls on Friday were strong, adding 227,000 jobs while the unemployment rate edged higher to 4.8%. The data did not support expectations that the Fed could raise interest rates in the Spring.

Expectations of a rate hike tend to support the Dollar and James Athey, a senior investment manager at Aberdeen Asset Management, said that “all of the numbers point towards it being more difficult to justify another hike in March”

The Fed, which raised rates in December, has forecast three rate increases this year. Whether it sticks to that pace depends on labour market strength as well as if President Donald Trump’s stimulus steps succeed in boosting growth and inflation.

According to Reuters, for the fourth week running, speculators have trimmed their bullish bets, with net long positions falling to their lowest since late October.

Rest of the World

Japanese wages, on an annual inflation-adjusted basis, dropped in December for the first time in a year, government data showed on Monday – a setback for hopes that consumer spending can increase and help lift economic growth.

The decline was caused by a rise in the cost of living, which outpaced nominal pay hikes, officials said. Higher prices for items such as fresh vegetables have increased living costs.

Data this Week

Tuesday:

Reserve Bank of Australia Interest Rate Decision

Wednesday:

Reserve Bank of New Zealand Interest Rate Decision

Thursday:

Swiss Unemployment Rate

Friday:

EU Economic Summit

Canada Unemployment Rate

UK NIESR GDP Estimate