UK and Europe
European stocks jumped on Thursday, taking heart from a new sense of stability in UK politics. Theresa May quickly forming a new government following David Cameron’s shock departure, despite a complete shake-up of the cabinet, reduces some of the uncertainty.
A “surprise” decision to keep rates on hold knocked the FTSE 100 off its perch. The UK equity benchmark came off an 11-month high as the British pound surged following the surprise decision from the Bank of England to keep interest rates unchanged at 0.5%. The move confounded consensus expectations of a 25bps cut but was in line with our conclusion that a rate cut, if deemed necessary would be more appropriate alongside inflation forecasts at the August meeting.
Stock markets, especially the FTSE 100 have been brushing aside the risks associated with Brexit because of the expected central bank response. The Bank of England’s decision to stay pat could prove a turning point in that line of thinking.
The Bank of England decision caused an abrupt change in FTSE leadership from homebuilders that benefit from lower interest rates to banks that have been hurt by them.
Early gains in homebuilding shares had seen investors brushing off warning signs from surveyors that the housing market is in trouble. The shares of firms with most international exposure which make most of their money in foreign currencies were hardest hit by the sharp rise in sterling following the decision to keep rates on hold.
The “Safe hands” of Philip Hammond overseeing the UK economy post-Brexit has been welcomed by markets. Mrs May’s early cabinet appointments confer stability through Philip Hammond as Chancellor of the Exchequer but also daring and an interest in reaching out to those who favoured leaving the European Union through Boris Johnson as Foreign Minister. Mr Hammond is considered a fiscal hawk and will likely be seen positively by investors who might have been concerned about Theresa May’s plan to reduce austerity and take on corporate governance rules.
Mr Hammond ruling out an emergency budget in combination with Prime minister May denying chances of a snap election adds another layer of certainty after the Brexit vote. An emergency budget would just have been another reason for companies to delay investment decisions and would add to the impact on confidence from the referendum result.
US
US stocks jumped on the open with a triple digit gain in the Dow Jones Industrial Average taking it well into new record territory. Every extra day the major averages can hold above last year’s highs, the more traders will start to believe that the breakout is sustainable.
Airline stocks saw another day of strong gains following strong results from Delta Airlines (NYSE:DAL) whilst banking shares leaped after JP Morgan quarterly results beat forecasts.
FX
The British currency has been pricing in a rate cut since the referendum result so today’s decision not to keep rates unchanged saw some dramatic repositioning. GBP/USD gained over 1.5% in the wake of the BOE decision, helped by a combination of short-covering ahead of the rate decision and relief that the UK is forming a new government quicker than previously thought.
The surged to new record highs in US stocks has seen traders give up on haven currencies including the Japanese yen which continues to depreciate following the second unsuccessful attempt of USD/JPY to break below 100.
Commodities
Crude oil gave back some of yesterday’s sharp losses as traders digest the pickup in two-way volatility that has developed this week.
Gold added to weekly losses as risk-on sentiment continues.
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