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BoE can only turn more hawkish
Queen Elizabeth II will reveal the new government’s agenda today; Conservatives will then officially start their second term in the government escorted by political and fiscal concerns regarding their program. On the plate are a peppery EU referendum and a tighter fiscal policy.
A quick glance to trade flows shows that the EU countries stand for one thirds of the UK’s trade relations, suggesting that a clear majority of the UK businesses are genuinely benefitting from the advantages of an economic union with the rest of the Europe. In 2004, the trade flow has reached 53 billion dollars, which makes it hard to imagine a majority of UK citizens voting for an exit from the EU. It would be shooting their own foot. As things get serious, the anti-Europeans will certainly think twice before rejecting the UK’s membership in the EU. This might, therefore be a massive non-event, somewhat similar to Scottish referendum.
Regarding the tighter fiscal policy, there is no doubt that a stronger budget is positive for the entire economy, yet not when the recovery is not fully confirmed. The Conservative government’s attempt to tighten the budget may potentially face resistance if the targeted 30 billion pound worth of austerity package interferes with the economic recovery. In the current Keynesian-led macro environment, the BoE could only stand ready to buffer potential drawbacks of a tighter budget and keep its own policy cautiously expansive. The Bank of England is therefore sitting on the dovish end of its monetary policy and the lack of early achievement on the fiscal edge could only pull the BoE toward more hawkish territories.
Equity gains capped, G7 in focus
The weaker pace of economic growth aside, given the recent demise in the euro and the low inflation climate its little wonder that the German consumer mood is improving.
The indicator showed a slight increase for June. Any upside in the DAX this morning seems restricted to the defensive space with the telecommunications sector and healthcare posting gains. Financials are lagging and ultimately showing a lack of risk appetite in early trade. The G7 meetings today are expected to focus on economic growth but it will be nigh on impossible to disregard the Greece issue as the talks progress.
Having tumbled below the 700 mark, almost all FTSE 100 sectors are gaining this morning. IAG (LONDON:ICAG) has added over 1% following Irish government approval to proceed with the Aer Lingus (IR:AERL) takeover. The banking sector is attempting to shrug off yesterday’s negativity with Barclays (LONDON:BARC) adding 0.72% in the first hour. The allegations that the bank has rigged FX rates and the potential fines that may arise as a result will likely keep investors on the sidelines for now.
The triple digit losses on the Dow yesterday have helped to vindicate the predominately underweight positions from the bigger equity brokers but as long as the 18,000 level holds firm we could see some of these losses pared today. Macro data is thin on the ground today to help drive direction. We are calling the Dow up 30 points to 18071.
Loonie falls ahead of rate decision
Investors have hard time digesting BoC Governor Poloz’s optimism regarding the Canadian recovery. On a recent speech, Poloz said the lower oil prices ‘could have a greater impact’ and the signs ‘lead up to believe that the impact of shock have been faster than previously thought than larger’. As the worldwide fight for market share continues at its fastest pace, there is little chance for Canada to jump back in the game before the oil prices rise back to $70/80 levels, and frankly such rise seems unlikely in the foreseeable future. Canada has been among the most hit oil producers given the high cost of its sand projects. The impacts have certainly be faster than imagined, and could in fact last longer. Faster US recovery is what can save the day, whereas the expectations for the first quarter growth in the US are merely satisfactory, with 0.8% contraction expected on quarter (annualized) verse 0.2% printed in first read.
Bank of Canada gathers today and is expected maintain its benchmark interest rate unchanged at 0.75%. Given the slight improvement in core inflation from 2.4% to 2.3%y/y in April, the BoC has the flexibility to maintain the low-rate environment. However the accompanying statement will certainly remain hawkish to boost investors’ enthusiasm to take advantage of low rates and to invest today without waiting for lower rates in the future and delay their capital spending.
USD/CAD pushed into the February-April year high range of 1.2325/1.2835, while the Canadian stocks closed yesterday’s session negatively, mostly due to losses in the energy and commodity sector. IAMGold Corporation (NYSE:IAG), Precision Drilling (NYSE:PDS) and Pretium Resources Inc. (NYSE:PVG) have been the heaviest hit. We are calling the S&P/TSX 130 points lower to 200-dma (14920), which has acted as good support over the past two months.
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