Good day, and apologies for the late writing of the Blog.
GBP has mounted an attack. Having been battered yesterday to 1.6950 levels, we have seen a fight back all morning with the GBP currently trading at 1.7028. In my opinion, Gov. Carney is trying to say too much without giving up his hand. He wants to try cool things and prepare the market for the future, but at the same time he is blowing hot and cold. Caught between a rock and a hard place, sometimes the best option is to lay the cards on the table and then keep repeating the same things so as not to give away any other info best kept under wraps. It is for this reason the market is starting to “fall out” with Gov. Carney. They just can’t work out what he is likely to say next.
Take this mornings comments (Financial Stability Report). On June 16 everything rocked, then a few days ago that was all turned on its head when he spoke of the labour market, and today he went one step further and said hold on the biggest risks to Britain’s recovery stem from the housing market and as such introduced measures to limit riskier mortgages and prevent an unsustainable buildup of consumer debt. Let’s be honest for a minute!!! The financial crisis of 2008 was caused by exactly that, housing bubble, mortgage bubble and most importantly consumer debt. Banks were “handing money over” to anyone who wanted it. 100% mortgages, loans, buy to let mortgages you name it people were up to their eye balls in debt. And then like a good pack of cards, it all crumbled into crumbs.
I find it hilarious how some Banks are looking to make up revenue for loses or lower revenue from trading. They not only have to make sure they are fully capitalised according to “Base lII”, but also make available loans to consumers and corporates to rebuild their balance sheets. Put it this way, when last did you go to a Bank for a Loan and walk out smiling?
Gov Carneys actions were prompted by booming demand for real estate and an increase in high loan-to-income mortgages. Today’s announcement is the boldest effort by a major central bank to actively tackle the threat of an asset bubble and avoid a repeat of the 2008 financial crisis. Carney added, “With recovery in the U.K. gaining momentum, the Bank of England is now focused on turning that recovery in to a durable expansion. Britain has a legacy of high indebtedness that if left unchecked could undermine that durability. The biggest risks relate to the housing market.”
In a separate announcement, the Chancellor announced that mortgages taken out under Help to Buy, a government program guaranteeing loans to people with small down payments, will be capped at 4.5 times income. So now the fun starts. The days of easy money are behind us. It might be “cheap money” but try get your hands on it and you are lucky. My point is people HAVE to cut their cloth according to their means!! It really is that simple.
Back to the markets, I still hold onto my views that the GBP will appreciate vs its major trading partners (€, $) as the economy continues to outperform its major trading partners. Furthermore I think come Q3, the $ will mount a major move (stronger) ag the € especially and it is for this reason that I suggested looking at doing either ratio calender spreads or straight even ratio calender spreads to take advantage of this.
Last point if you had not seen it already US GDP came out at a woppingly poor -2.9%. I guess now you see why I have been going on about the timing of any rate hike and how important it is to GET IT RIGHT the first time
Take care and all the best