Wednesday, November 6, 2019

Strong US economic data drives the greenback; will the BoE hold interest rates again this month?


Market recap: US-China trade pact in question once again

US equities ended Tuesday mixed, as strong US economic data balanced the effects of escalating US-China trade tensions. The Institute for Supply Management (ISM) Non-Manufacturing Purchasing Managers’ Index (PMI) beat expectations for October (of 53.5), increasing to 54.7 from 52.6 in September. China is reportedly pushing for the withdrawal of threats of new tariffs in future and rollback of duties on about US$110bn worth of goods that was imposed in September as part of the phase one trade deal with the US. It is unclear if US President Donald Trump will agree to the terms.

The DJIA rose 0.11%, the S&P500 fell slightly by 0.12% and the Nasdaq remained mostly flat, inching higher by only 0.02%. The Dollar Index gained 0.49% as probabilities for a future Fed rate cut in the medium-term slipped.

Meanwhile, safe haven assets fell as the US economy strengthened. Gold slipped 1.74% and the yen weakened by 0.53% against the greenback. US Treasury yields gained, as two-year yields rose 4bps to 1.62% and 10-year yields spiked 8bps to 1.86%.

Asia equities was similarly mixed on Wednesday’s morning. The Nikkei and Straits Times Index started the trading session 0.39% and 0.12% higher respectively while the Hang Seng Index opened the day 0.17% lower.

SoftBank will be reporting earnings for the quarter after Tokyo stock markets close today while Baidu, Qualcomm and Roku will release their quarterly earnings after the US stock markets close.

Today’s Analysis: Bank of England continues to be plagued by Brexit uncertainty

The Bank of England (BoE) is set to announce its decision on monetary policy tomorrow at 4pm (GMT +4). At the last monetary policy meeting in September, BoE’s Monetary Policy Committee voted unanimously to maintain interest rates at 0.75%. The increasing uncertainty around Brexit and the intensifying US-China trade dispute was the highlight of September’s meeting. BoE officials expect an excess supply may occur due to the Brexit’s uncertainty. While the situations have already been changed at the moment and we believe a significant rise in demand may possibly occur, as the Brexit’s deadlock may get resolved soon after Prime Minister Boris Johnson succeeded to fight for an early general election on Dec 12.

Futures tracking BoE interest rate decisions indicates that a 98.4% probability for no change in interest rates is priced into the market. This is likely as the BoE will certainly wait for more clues for Brexit’s future as the UK parliament dissolves for a general election on December 12th. The outcome of the general election will likely give more clarity on Brexit. Should the Tories gain the majority after the election, as the EU has already agreed with Boris’ deal, it is clear that Boris will carry out Brexit before Brexit deadline Jan 31.

The recent opinion polls suggested that Boris’ led Conservatives Party is in the leading position, which can therefore explain the recent strong performance of the Sterling. Provided that the result of the election will be coming soon, it is reasonable and tenable for the BoE to remain the monetary policy unchanged tomorrow.

On the other hand, the UK’s economic data has remained little changed since the last meeting. Inflation remained flat at 1.7% for September, falling short of an 1.8% consensus. The UK economy expanded at an 1.3% year-on-year rate, outperforming expectations. The labour market also remained relatively robust with unemployment rate below 4%.

UK's economy remains little changed since September's monetary policy meeting

It is likely that BoE will hold rates at 0.75%, as BoE officials are likely to prefer to wait for more clarity on Brexit. Also, the UK economy does not give any strong reason for the central bank to push for stimulus. But expect BoE’s forecasts for future growth and inflation in 2020 and 2021 to be revised downwards. Carney is unlikely to speak much about his future successor (who is set to take his place on January 31st 2020), but will likely reiterate that the new BoE Governor will be appointed only after the December general election. Cable is hence likely to inch lower on the news, possibly to 1.2808’s level but is still expected to range between 1.2808 and 1.2952 in the near-term.

Bulls maintain overall control over cable, but fight for short-term possession with beards (H4)

Bears and bulls both remain cautious as the UK prepares itself for a general election. But the bulls look to still maintain overall control, as GBP/USD trades above the 200-day moving average. As the near-term is uncertain, expect both bears and bulls to try to gain possession over the pound in the near-term. If the bulls manage to break past the 1.2952 resistance level, then we may see momentum push the pound above 1.3008’s level. If bears gain control and break the 1.2808 support, then expect the pound to weaken more against the dollar, possibly to 1.2738’s level.