Pound jumps on ‘Hawkish’ BoE

Thursday February 8: Five things the markets are talking about

The global equity markets remain unnerved as U.S bond yields again trade atop of their four-year highs after U.S congressional leaders reached a two-year budget deal to raise government spending by almost +$300B.

The bi-partisan deal is expected to stave off a government shutdown, while at the same time widen the U.S federal deficit even further – bond dealers suggest that it could lead to a faster tightening cycle on inflation worries.

Note: The Senate and the House are both expected to vote on the proposed deal today, amid some opposition on both sides of the aisle.

1. Stocks mixed results

In Japan, the Nikkei share average rallied overnight, driven higher by bargain hunters. The Nikkei ended up +1.1%, but has still lost nearly -6%on the week. The broader Topix rose +0.9%.

Down-under, shrugging off early weakness on falling commodities stocks, the Aussie benchmark finished modestly higher, up for a second consecutive day, the S&P/ASX 200 rose +0.2%.

In Hong Kong, stock prices steadied after a five-day losing streak. At close of trade, the Hang Seng index was up +0.42%, while the Hang Seng China Enterprises index fell -0.43%.

In China, stocks ended lower to post a third consecutive session of losses overnight, with the benchmark Shanghai index hitting a six-month low, despite trade data showing the country’s performance exceeded expectations. At the close, the Shanghai Composite index was down -1.42%, while the blue-chip CSI300 index was down -0.96%.

Note: China trade balance (USD): +$20.3b vs. +$54.7be; Exports y/y: +11.1% vs. +10.7%e, Imports y/y: +36.9% (fastest growth since Feb 2017) vs. +10.6%e. The yuan dropped the most in two-years amid speculation that policy makers will step up efforts to rein it in after trade figures missed estimates.

In Europe, regional indices are trading lower across the board, mirroring the decline in Wall Street yesterday.

U.S stocks are set to open in the black (-0.2%).

Indices: Stoxx600 -0.5% at 378.3, FTSE -0.6% at 7236, DAX -1.0% at 12466, CAC-40 -0.6% at 5226, IBEX-35 -0.8% at 9901, FTSE MIB -0.6% at 22840, SMI -0.2% at 8958, S&P 500 Futures -0.2%

2. Oil slides as U.S output soars, gold lower

Oil prices have hit new six-week lows overnight after data showed U.S crude output had reached record highs and the North Sea’s largest crude pipeline reopened following an outage.

Brent crude futures are down -14c at +$65.37 a barrel, while West Texas Intermediate (WTI) is down -15c at +$61.64 a barrel.

Note: Brent futures have lost around -8% from their four-year January high print of +$71. Futures positions suggest that investors are sitting on the largest ‘bullish position in history.

The U.S. Energy Information Administration (EIA) this week upped its 2018 average output forecast to +10.59m bpd, up +320k bpd from its last forecast 10-days ago.

The output is now higher than the previous bpd record from 1970 and above that of top exporter Saudi Arabia.

Ahead of the U.S open, gold prices have extended their drop and printed a fresh four-week low, on a firmer dollar and market expectations of more U.S rate hikes this year. Spot gold is down -0.4% at +$1,312.41 per ounce.

3. BoE to tighten sooner rather than later

The Bank of England (BoE), as expected, kept rates steady this morning, but indicated it is likely to ‘tighten’ monetary policy “faster and further” than it had anticipated three months ago.

In the BoE’s view, investors had expected one quarter-point rise in 2018 and subsequent years. But at that rate, inflation would still be slightly above target in early 2021, so a slightly more aggressive series of moves is needed.

The BoE vote was unanimous to keep rates at +0.5%. Gilt yields have jumped, with 5-year backing up to +1.066% from +1% before the decision.

Yesterday, the Reserve Bank of New Zealand (RBNZ) again held overnight rates at a record low and projected they will stay there until mid-2019 as inflation remains subdued amid slower economic growth.

“Monetary policy will remain accommodative for a considerable period” according to acting Governor Grant Spencer.

4. Pound jumps on ‘Hawkish’ BoE

Sterling (£1.4035) has rallied aggressively across the board after the BoE brought forward its rate hike expectations – the pound was trading atop £1.3885 before the announcement and EUR/GBP has fallen -0.87% to a new one week low of €0.8750 from €0.8812 beforehand.

USD has consolidated its recent gains after its best daily performance in four months yesterday. The greenback caught a bid after the White House and Senate leaders stated that deal had been reached on a two-year budget that included large increases to both defense and non-defense spending.

Elsewhere, the EUR/USD (€1.2259) remains within striking distance of its two-week low outright as the pair tested €1.2235 in the overnight session. A plethora of ECB speakers have provided little new clues on the outlook for the Eurozone. From the techies, the key support for the pair remains at the psychological €1.21 level.

USD/JPY (¥109.67) is edging back to the upper end of its recent range with the 110 level back in play.

5. German goods exports soar to new records

Data from the German Statistical Office (Destatis) showed that exports of German goods hit a new high last year, amid strong global demand for premium engineering goods.

Exports of goods surged +6.3% to almost €1.3T last year to mark a new record.

Digging deeper, Germany’s plant and machinery makers remain upbeat, with strong demand from China and the U.S. contributing to a +4% rise.

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