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Market buzz: May BoE hike 'not set in stone', FTSE 100 enters correction
Thursday 22 Mar 2018

(ShareCast News) - 1700:Close Global trade concerns sent stocks lower as traders debated the implications of the Bank of England's latest communications and that of its US central bank's counterpart overnight, with a global trade war brewing. Combined, those two factors saw the top flight index slide below the 7,000.776 point mark and into correction territory after having fallen by over 10% from its record highs. On the subject of the Fed, one well-known bond pundit - arguably the best-known one - questioned the central bank's ability to push policy rates much above 2.0% given the degree of leverage extant in the world economy at present. He may have a point. On the subject of China, analysts at BoA-Merrill penned a note telling clients that: "Asset prices in China are pricing in a growing sense of unease over the past couple of months, which was not seen in 2017. "The Shanghai Composite Index was the worst-performing index across major indices during the equity rout in February, with property sector being hurt the most. Both ferrous and non-ferrous metals started to plunge in March. These put into question whether the growth momentum we observed in 2017 remain to be solid. If these are the early signs of softer Chinese demand, more assets may be re-priced." 1605: CBOE VIX up 25.64% at 22.44. White House's lead lawyer in Mueller special-counsel case has reportedly decided to stand down. Reports indicate Trump has added a lawyer to his legal team who believes the FBI and DoJ are trying to frame Trump with false charges of colluding with Moscow during the past elections. Against that backdrop, ETX Capital's Neil Wilson weighs in, saying: "The FTSE is on the ropes as it flirts with key support at 6919, the Feb 6th low. The move lower was rejected but the market is very much on the back foot as broader risk sentiment turns off. "The Dow is also sharply lower today, losing about 400 points to reach its weakest in 3 weeks as fears of a trade war have collided with pessimism around tech stocks post-Facebook's data row. In the UK, a series of alarm bells in the retail and tech sectors has also knocked sentiment. We also have the prospect of rates rising faster both in the US and UK, which all else equal is a downer for stocks." 1536: From Richard Hunter at Interactive Investor: "At current levels, the FTSE100 is just a few points from being down 10% in the year to date, knocking on the door of what is often described as correction territory. "[...] This is despite the global, synchronised economic recovery where corporate earnings have so far continued to justify some slightly rich valuations, especially in the US. The UK economy has remained resilient despite any impending Brexit fallout, with the result that some of the top quality FTSE100 companies are moving towards bargain territory - and could even, as a consequence of this index weakness, find foreign groups running the slide rule over some of them as potential bid targets." 1459: According to Janus Henderson's Bill Gross, "The Fed's purported three to four hikes this year beginning in March are likely exaggerated. "The U.S. and global economies are too highly leveraged to stand more than a 2 percent Fed Funds level in a 2 percent inflationary world." 1322: Analyst Mike van Dulken at Accendo Markets is looking at the FTSE 100's drop and wondering if there may be a technical signal for more declines. Specifically he suggests there may be a bearish flag pointing the way to 6,700. 1303: March's BoE meeting delivers no change in rates, but, says Howard Archer, chief economic advisor to the EY ITEM Club, the "tone of minutes and two dissenters in favour of an immediate rise point to a hike in May". He says the economic rationale for tighter policy "remains questionable, but the MPC seems unlikely to backtrack. 2018 looks like being the year when monetary policy normalisation really gets going". 1231: The London midday market report (London's most companiest) has stocks extending losses as the pound held its gains after the Bank of England decision, as expected, while leaving the way open for an increase in May. The FTSE 100 was down 1% to 6,969.35, having already fallen further into the red and below the 7,000 mark before the rate announcement, while the pound was up 0.3% versus the euro at 1.1496 and 0.1% firmer against the dollar at 1.4155, as the BoE voted to keep interest rates on hold at 0.5%, as widely expected. 1224: Not all economists are of the same view when it comes to the Bank of England. Capital Economics and Pantheon Macroeconomics are generally of opposing views when it comes to BoE interest rates. Here's Paul Hollingsworth at CapEco: "While the MPC stopped short of explicitly committing to another hike in May, the surprisingly-hawkish tone of March's Minutes suggests it seems very likely." He noted that the MPC minutes sees the economy broadly on track with forecasts and "increasing confidence that growth in wages and unit labour costs will pick up to target-consistent" levels, with some comfort presumed to be taken from the Brexit transition deal. Hollingsworth admits that "a May hike is not set in stone" if the economy were to turn out much weaker than the MPC expects and wage growth softens, but the squeeze on real incomes abating, one of the key factors weighing on the economy is fading. He sees the MPC "wary of falling behind the curve. As a result, we still think that the MPC will hike interest rates in May. And if the economy continues to surprise on the upside, as we expect, then that should allow the MPC to raise interest rates twice more before the end of this year." Here's Pantheon's Sam Tombs: "Ignore the split rate vote; the real news is that the Committee has chosen not to signal an imminent rate rise as clearly as it did last year." He notes September's MPC line that it would hike "over the coming months" and that today the committee has not given any time-bound guidance but just reiterated its conclusions from February. The Committee's confidence has been knocked by a "few surprises in recent economic data", assumed to be disappointing PMIs, retail sales and February's 2.7% CPI coming in below the MPC's 2.9% forecast. Tombs concluded: "A rate increase in May still is under active consideration, but the likelihood is nowhere near as high as the 80% chance priced-in by markets before this meeting. We continue to expect activity and inflation data to surprise the Committee to the downside, ensuring that it waits until August to raise interest rates again." 1202: The Bank of England's monetary policy committee voted to keep policy on hold, but there was a split in the vote of 7-2 from the 9-0 previously. This saw the pound spike up to 1.42. Dissenting from the vote to maintain Bank Rate and the size of the asset purchase facility at their current settings of 0.50% and £435bn, respectively, were Michael Saunders and Ian McCafferty - as some economists had expected. 1109: Sterling's appreciation since the start of the week has clearly stemmed from the Brexit transition deal, says Rabobank, but today the focus of the pound will be firmly back on economic fundamentals and the degree of hawkishness from the BoE at today's policy meeting amid "mixed signals" from recent economic data. There is no strong expectation that the BoE is poised to hike rates today, with the market strongly priced for a 25 bps rate hike in May with a good chance of a follow on move by the end of the year. "This week's announcement of an EU/UK deal on the Brexit transition increases the risk of a second move this year," Rabo's Jane Foley says, though if Brexit trade talks stalling in the autumn or wages don't pick up "the Bank will likely find it difficult to pull the trigger in November". With a May rate hike almost fully priced in, along with a boost from the Brexit transition deal, Foley expects further near-term gains for GBP to be "difficult". 1020: Three-month LME copper up at $6,839 per tonne, versus the prior day close of $6,737, despite PBoC's decision overnight to nudge its reverse repo rate higher by five basis points to 2.55%. In parallel, the US dollar spot index is down 0.08% at 89.71, off its intra-day lows of 89.396. 0956: The FTSE 100 has broken below the 7,000 level, which it last clambered above in December 2016, with a fall of 40.4 point or 0.57% to 6,998.55. The pound looks has been a key part of this. Sterling's collapse post the Brexit referendum in 2016 helped boost the benchmark's large coterie of companies that make most of their earnings overseas. The pound has regained the $1.4 level recently. "The pound is trading higher this morning as we head towards the BoE decision; the centre point of this pivotal week for sterling. There will be no press conference at this meeting, so investors will extract all that they can from the voting spilt and the statement," says Fiona Cincotta, a market analyst at City Index. The BoE are broadly expected to keep rate on hold, though markets are currently pricing in a 66% probability for a May hike, which shoots up to 75% in June. "Any hawkish slant from the BoE in light of clearing headwinds, thanks to the Brexit transition deal and wages increasing above inflation, could give the pound an extra boost pushing GBP/USD towards $1.4280, a late Jan high. Traders will be particularly keen to see a voting split other than 9-0, for confirmation that the more hawkish MPC members are already setting their sights on a hike," Cincotta says. 0918: De La Rue's chief executive has called on the government to reverse its decision to award the contract for making post-Brexit blue passports to a Franco-Dutch company. Martin Sutherland said the decision was "disappointing and surprising" and bad for the economy. He invited Prime Minister Theresa May and Home Secretary Amber Rudd to visit his factory and justify the decision to De La Rue workers who have made UK passports for the past 10 years. 0909: Couple of notes from Goldman Sachs, including one on the "something for everyone" FOMC meeting last night. "We expect the next rate hike to come in June with subjective odds of 80%, and our baseline forecast remains four hikes in 2018 and another four hikes in 2019." Analysts also took a look at Just Eat. The decision to invest in delivery "is the correct one we believe", forecasting long-run UK EBITDA margins will remain above 50%. "Despite downgrades to estimates post recent management guidance, we continue to see Just Eat growing top line and EBITDA at a >20% CAGR over the next 3 years, leaving valuation favourable vs European peers." Remains a 'buy' on the bank's conviction list. 0902: Shares in IG are higher after it reported trading revenues surging 30% in a record quarter, thanks to a high level of client activity as market volatility returned. 0840: It's London's 'most companiest' - our catchy new slogan - market report, with 30 (count em!) companies mentioned - surely no other marker report comes near...? Stocks are edging lower in early trade on Thursday as investors shifted their attention to the Bank of England, after the US Federal Reserve hiked rates as expected a day earlier, while ex-dividend stocks weigh as they often do on a Thursday. At 0830 GMT, the FTSE 100 was down 0.3% to 7,019.28, while the pound was flat against the euro at 1.1459 and 0.2% firmer versus the dollar at 1.4168. Ex-divs were taking six points off the FTSE 100 and 21.5 points off the 250. Sky, British American Tobacco, Randgold Resources, Segro, Schroders, Meggitt, Centamin, GVC Holdings, Close Bros, Kier Group, OneSavings Bank, Stobart and Dunelm all went ex-dividend today. 0814: Reckitt Benckiser has walked away from discussions with Pfizer about buying parts of the US drugmaker's consumer healthcare business, leaving the way clear for GlaxoSmithKline. GSK will certainly be in a strong position to buy the business from Pfizer, which said in October it was considering selling or spinning off the division, which is valued at about $15bn. 0812: The FTSE 100 has opened in the red. The UK top flight index is down 0.3% to 7,016.28. 0803: Ted Baker shares are down as the clothing retailer reported a 12% jump in full-year pre-tax profit but the retailer warned that "external" trading conditions will remain challenging. Boss Ray Kelvin thanked staff "for their hard work and Tedication during the year". 0756: In London the main event is the Bank of England's monetary policy committee meeting, even though no immediate change to policy is expected. As there is no meeting in April, this is the committee's last real chance to lay the groundwork for a interest rate hike in May. Some analysts expect the monetary policy committee vote count to revert to a split, from the recent 9-0 consensus, with hawkishly inclined Michael Saunders and Ian McCafferty to again make the case for a hike.

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