The big movers on the FTSE 100 in the last 24 hours have been the homebuilders, after Mark Carney’s attempts to cool the housing market have been labelled toothless. The homebuilders were expecting draconian measures, what they got was a tap on the hand, and relief rally has continued to gain momentum on Friday.
More bark than bite
The measures, announced in the latest Financial Stability Report, mean that no more than 15% of any lenders’ total number of new mortgages can be made at a ratio of higher than 4.5 times the borrower’s income.
In the four quarters to March 2014, only 20% of lending in London was at or above loan-to-income ratios of 4.5. Thus, although these measures may take some of the froth off the market, they are still fairly mild compared to some predictions prior to the report.
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The financial market reaction was wider than just the relief rally from the homebuilders. With macro-economic measures unlikely to have a major impact on the housing market, the focus is still on interest rates, and the market is still expecting the first rate hike at the start of next year.
However, if house price growth continues to rise then the Bank may have no choice but to raise rates sooner than expected, in order to preserve financial market stability. This has helped to boost GBPUSD, which is back above 1.70 as we end the week. So what are the long term implications for the markets?
Stocks: Barratt (LONDON:BDEV) and Persimmon (LONDON:PSN), two big home builders on the FTSE 100, have been the big winners and their share prices are up some 10% since the measures were announced. They have both declined steadily since peaking in March. Now that we know macro prudential measures have more bark than bite, the homebuilders could see a more extended recovery.
Persimmon had fallen more than 20% since peaking on 25th Feb, in the last 24 hours’; it has managed to cross back above its 200-day sma, which is a significant level of resistance. A weekly close above the 200-day at 1,271p, could open the way to further upside.
FTSE 100: After falling on Thursday, this index is clawing back losses at the end of the week. The financial sector is one of the best performers in the last 48 hours. We continue to think that there could be further upside for theFTSE 100 in the medium-term, even though the lack of macro prudential measures could trigger an early rate rise.
On Friday, Mark Carney said that interest rates are unlikely to return to the pre-crisis levels of around 5%, instead they could be half that level at 2.5% by 2017, according to the Bank of England’s latest forecasts. He also mentioned that any rate rises will be gradual. Thus, a low interest rate environment (at least until the end of Carney’s term) could be supportive for UK stocks going forward.
Sterling: GBP/USDrallied on the news about the macro prudential measures announced by Mark Carney on Thursday. The pound is lower today, as prospects of a slower pace of rate hikes weigh on the British currency. However, GBPSUD remains above 1.70, and any dips have been shallow so far.
However, a weekly close above 1.7043 (the August 2009 high) is necessary before we can expect any further upside. The currency market is less sensitive to measures to cool the housing market compared with the stock market, but any expectations of a rate hike late in 2014/ early 2015, could be GBP positive in the medium-term.
Takeaway:
- The BOE’s macro prudential measures to cool the housing market are fairly toothless.
- The homebuilders are breathing a huge sigh of relief, and their stock prices are leading the FTSE 100 as we end the week, and there is the potential for an extension of the rally.
- The FTSE 100 is in a sweet spot, although rates could rise in the coming months, BOE Governor Carney has pledged to keep rates lower than they were prior to the crisis, and this low-rate environment could benefit the market in the medium-term.
- The pound is less directly impacted by the housing market measures; however, the prospect of a rate hike in either late 2014/ early 2015 has been enough to get GBP/USD back above 1.70. We need to clear 1.7043 (Aug 209 high) before we can expect another leg higher for this pair.
Source: Bloomberg
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Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.
Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.