The MPC met, and the Bank of England announced that they would maintain rates at 0.5%. As I suggested in yesterday’s post sterling was likely to strengthen in this scenario.
The FTSE also fell on the news, but to be honest it wasn’t a big deal in the scheme of things as the index didn’t lose much in percentage terms on the day.
For the life of me though I don’t understand why the media has described the outcome as a surprise. What am I missing here, looking at the economist forecasts, the predictions were for 3 votes to cut, and 6 to hold, in the event we got only one voter pushing for a cut and the rest elected to remain on hold. Yes that’s a slightly more hawkish stance than expected, but listening to the BBC and reading the FT, you could be led to believe that a cut was actually expected. Hmmmm… I confess I haven’t looked at the front-end of the fixed income market, perhaps that’s where the answer is to be found.
There continues to be negative commentary regarding the fate of the UK economy, with Larry Fink, the CEO of BlackRock warning of a Brexit induced recession, with as much as 2% taken off UK GDP. I would love to argue against this, but the lead up to the EU referendum unquestionably affected business sentiment and activity. Even now, it’s hard to say that key decisions are being made as many investors and businesses wait to get a clearer picture of how the UK manages its exit from the European Union. There are key points that need to be clarified, not least, are some businesses going to move operations from the UK? What will happen to house prices? How much of the Eurobond business will the City of London retain? Clearly it’s best to characterise the MPC’s decision today as changeable, if the data is as bad as the doomsayers say a cut is still likely. This means that there really is no reason to expect a substantial rally in the pound from here. It’s possible that news over the coming days might be sterling positive, but eventually it’s all about the economy, and the prospects are gloomy. On that basis, we still expect the pound to continue its depreciation trend. This time it would probably make sense for the euro to weaken as well, albeit much less so than the pound. Expect the dollar to be the winner in this zero sum game.
Prime Minister May’s ministerial appointments continue to be announced. Not much to say about most of it for now. But… Boris Johnson as Foreign Secretary? This is either a stroke of genius or folly. I’m leaning towards genius myself, but for those who haven’t seen this, have a look at the reaction of one of the leading Labour politicians, this is not an atypical reaction in the UK. I think it’s genius because he is actually an extremely intelligent man who can be very charming and charismatic. He’s got a lot of work to do, given the insulting rhetoric he employed during the referendum campaign. It’s genius because he is clearly no friend of the new Prime Minister, but he’s too big a beast to ignore. As the Don said in ‘Godfathers’ keep your friends close, but your enemies closer. I believe President Obama employed the same tactic when he chose Hillary Clinton as his Secretary of State. Time will tell. Boris seems to have been right about one thing, word is discussions are already under way between US and UK trade officials. Perhaps they didn’t lie about everything after all.
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