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Category: Money and Monetary Policy / Stockmarket / Currency / Futures / Markets

Morning markets: UK rate cut hits pound, lifts shares

Friday, 5 Aug 2016 06:58:28 | Michael Janda

The British pound plunged on the cut, with an Aussie dollar worth 58.15 pence. (Shaun Curry, file photo: AFP)

The Bank of England has slashed interest rates to just 0.25 per cent and embarked on a new round of money printing, sending the pound plunging and British stocks surging.

Markets at 8:50am (AEST):

  • ASX SPI 200 futures +0.3pc to 5,452
  • AUD: 76.25 US cents, 58.15 British pence, 77.15 Japanese yen, 68.55 euro cents, $NZ1.0635
  • US: Dow Jones -3 points to 18,352, S&P 500 flat at 2,164, Nasdaq +0.1pc to 5,166
  • Europe: Euro Stoxx 50 +0.7pc to 2,932, FTSE 100 +1.6pc to 6,740, DAX +0.6pc to 10,228
  • Commodities: Brent crude +2.6pc to $US44.18 a barrel, iron ore -3pc $US58.90 a tonne, gold +0.2pc to $US1,361 an ounce

British interest rates are now at their lowest level in the Bank of England's (BoE) 322-year history.

The BoE had essentially flagged this month's cut when it disappointed traders by not cutting rates last month, in the immediate aftermath of the surprise Brexit vote.

After that disappointment, the BoE made sure to pull out all its monetary firepower this month, not only cutting interest rates for the first time since 2009 but also pledging to buy an extra 60 billion pounds ($103 billion) worth of government bonds using freshly minted cash over the next six months.

Aside from this fresh quantitative easing, the BoE will also launch a 10-billion-pound corporate debt buying spree and a program worth up to 100 billion pounds to ensure rate cuts make it through to borrowers.

The Bank of England's governor, Mark Carney, said he had unleashed an "exceptional package of measures" because of the economic stagnation likely to result from the Brexit vote.

"By acting early and comprehensively, the (bank) can reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the UK economy," he told a press conference.

Despite the extra stimulus, IG market analyst Angus Nicholson said the outlook for the UK economy remains weak.

"BoE governor Mark Carney's assessment of the post-Brexit UK economy was very negative, predicting the unemployment rate will rise from 4.9 per cent to 5.5 per cent over the next two years despite the new stimulus," he wrote in his morning note.

This makes it very likely that further cuts to the policy rate and expansions of the BOE's other easing measures will be forthcoming over the coming months, providing further downside risks to the pound provided US economic activity does not begin to steadily weaken.

The British pound lost more than one-and-a-half per cent against the greenback overnight, a neat inverse of London's FTSE share index which gained more than one-and-a-half per cent.

The BoE's moves to support British banks were also seen as a useful template for avoiding negative interest rates, which have proven unhelpful for Japanese and European banks.

That saw continental banks gain in the hope that the European Central Bank might take a lead from its counterpart across the Channel.

Traders in the US were less certain about which direction to move in, with stocks there finishing flat.

However, the ASX looks set for moderate gains early on, despite a fall in Chinese iron ore spot prices yesterday.

The Australian dollar performed well overnight, not just against the pound, but it also held its ground against the US dollar.

Today's agenda:

Australia:
  • RBA Statement on Monetary Policy (11:30am AEST)

US:
  • Non-farm payrolls (10:30pm AEST)
  • Average hourly earnings (10:30pm AEST)
  • Trade balance (10:30pm AEST)

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