There has been further gains seen for leading stocks in London this morning, with the FTSE 100 reaching an 8-week high and closing in on the 7500 level. The pound is falling lower across the board after some short-lived gains during Wednesday’s session and sterling has now erased practically all of the post BoE gains against the US dollar.
S&P questions BoE motives
With the pound now having handed back the bulk of it’s gains seen following a pronounced hawkish shift in the last BoE meeting, questions are rising around the central bank’s motives for the deliberate move. S&P Global Ratings stated yesterday that they were of the belief that the Bank and Mark Carney selected their recent stance primarily to prop up sterling and reduce imported inflation pressures. With several inflation metrics running well above the 2% target mandated to the BoE - and the root cause of this increase in price pressures coming from the rapid post-Brexit vote depreciation in the pound - it is entirely plausible that the Bank are looking to jawbone the currency higher whilst keeping monetary policy little changed.
GBP strength built on false promises?
The main issue with this approach is that whilst central bank rhetoric can affect markets in the near-term the stance needs to be supported by accompanying policy shifts for a sustained move to occur. In other words, a few well placed words at the right time can cause a short term move in currencies but ultimately these statements need to be supported with actions. September's rise in the pound will remove some of the upward pressure from imported inflation on sterling but should there be further depreciation ahead of the November meeting, then the attempts may be deemed futile. Furthermore, pursuing a strategy of attempting to manipulate FX rates to more favourable levels is a risky one, with BoE members putting their credibility on the line. Governor Carney has previously been labelled an “unreliable boyfriend” for failing to follow through on his forward guidance, and should he once more not deliver then there could in fact be a backlash in the markets, leading to a sustained drop in the pound. This would compound the Bank’s problems of a weaker currency leading to higher levels of imported inflation. Carney and his fellow members will be acutely aware of this, and are likely taking a calculated risk in attempting to pull off a fine balancing act which has the potential to backfire badly.
Tesco (LON:TSCO) rises near to 6-month high
Wednesday’s session was a turbulent one for Tesco, with the stock surging higher on the open after reporting a pleasing set of results, before a wave of selling saw the price end the day lower. Whilst the results were robust and overall pleasing, they were slightly softer than some analysts' forecasts. There has been further buying this morning with shares currently higher by 2.5% and Tesco leads the gainers on the broader benchmark. Anglo American (LON:AAL), Glencore (LON:GLEN) and Rio Tinto (LON:RIO) are all sitting on notable gains on the day, with the drop in the GBPUSD providing a de facto boost to the miners. After a decent run up of late there appears to be some profit taking in banks with Standard Chartered (LON:STAN), Barclays (LON:BARC) and Lloyds Banking Group (LON:LLOY) amongst the biggest losers. Interestingly, the yield on 10 year gilts remains close to its recent highs with the market not supporting the latest weakness seen in sterling and therefore the rising rate environment which supported recent strength in banks remains in place.