Thursday, December 19, 2019

The euro and US indices fall; will the BoE announce its new Governor today?

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks

Market Recap: FedEx’s woes drag down the US equity market

The DJIA and the S&P 500 were dragged down by FedEx shares on Wednesday, after the logistics giant cut its profit forecast for 2020. Its shares tumbled 10.03% after it forecast a fall in profits for 2020 thanks to rising expenses, a global shift toward protectionist trade policies and its split from Amazon. But the Nasdaq managed to inch slightly higher on Wednesday thanks to gains from Tesla, Netflix and Facebook.

Indexes_Change

Sterling continues to remain under pressure as a no-deal Brexit is still a possibility going into 2020. The euro tracked the pound’s losses on Wednesday as well, although German business expectations improved in December. The IFO’s Business Climate and Expectations survey rose to 96.3 and 93.8 from 95.0 and 92.1 respectively. Both survey figures beat economists’ forecasts.

Major currencies performance against the dollar

Safe haven assets fell on Wednesday thanks to a stronger greenback. The improvement in the US economy on Tuesday put more downward pressure on probabilities for a Fed rate cut in 2020, pushing the dollar up higher on Wednesday. Gold, yen and US treasuries all fell. Benchmark 10-year yields gained 4bps to 1.92%.

Safe Haven Assets

US Treasury Yields

Asia stocks look set to track US losses on Thursday. The Nikkei started Thursday’s trading session 0.09% higher but fell later in the morning. The Straits Times Index opened 0.14% lower. In Japan, the BoJ announced that it would keep monetary policy unchanged today morning as the Japanese government’s fiscal stimulus package and the US-China phase one trade deal brought optimism to its economic outlook.

Asia change

Today's Analysis: BoE unlikely to change rates for first monetary policy meeting after UK Election

The Bank of England (BoE) will announce its decision on monetary policy at 4pm (GMT +4). Investors expect the central bank to hold, as overnight index swaps indicate only a 1.8% probability for a rate cut. The other key focus of today’s decision will be on BoE Governor Mark Carney’s successor, who will take over control of the central bank on February 1st 2020. Also, tomorrow at 5.30am (GMT +4), the PBoC will be deciding on its one-year and five-year loan prime rates.

This will be the first monetary policy meeting after the December 12th UK General Election, where British Prime Minister Boris Johnson and his Conservative party secured a sweeping victory and regained their majority in the House of Commons. As a result, most of the contributing factors to today’s decision will be political as well.

While the Tories’ electoral victory reduces the risk of a prolonged Brexit withdrawal, Johnson’s reluctance to extend the post-Brexit transition period past the December 31st 2020 deadline renews worries of a no-deal Brexit. In essence, the UK only has 11 months to negotiate a trade deal, a timeframe that Brexit negotiators and analysts see as pretty much the best-case scenario for a barebones trade deal with the EU.

The UK’s economy is also showing signs of a slowdown, with declining labour market data and weak manufacturing PMI data from Markit in December. November’s inflation rate also gives reason for monetary policy easing, as it holds at a three-year low of 1.5%. Sterling has also gained against currencies of the UK’s major trading partners, even after a sharp decline thanks to renewed no-deal Brexit worries that depressed the British currency. A stronger sterling will most likely weigh on inflation rates as well.

Inflation continues to fall short of BoE’s target rate; GDP signals that the UK economy is stagnating

Inflation continues to fall shore of BoE's target rate

Unemployment rate continues to stay flat but September’s wage growth declined sharply

Unemployment rate continues to stay flat but Septembers wage growth declined sharply  

The current favourite to take over Carney as Governor is Dr Dame Minouche Shafik, former Deputy Governor of the BoE and current Director of the of the London School of Economics and Political Science. If Shafik is announced as Carney’s successor, the pound may fall as she has been more dovish on monetary policy than Carney when she served as Deputy Governor for the central bank. 

As Carney is set to end his tenure as Governor and as the political situation in the UK has stabilised, the central bank is unlikely to change its monetary policy. But expect BoE officials to be split on the decision, with officials Michael Saunders and Jonathan Haskel likely to repeat their vote for a rate cut and likely a third official joining them. Sterling is expected to fall as a result, with GBP/USD possibly falling to 1.3007’s level. If Shafik is announced as Carney’s successor, GBP/USD is likely to fall even further, possibly to 1.2965’s level, as probabilities for a rate cut in 2020 increase.

Scenario - Effect on GBP and USD