BOE Hawks Rule Pre-Qir As Easyjet Contributes To FTSE’s Dive

EasyJet Plc (LONDON:EZJ) nosedives

Having posted a new record high last week on the back of the UK election result, the FTSE 100 is on the back foot today. The index has fallen below the psychological 7000 level and the risk-off sentiment has extended to over 90% of the UK benchmark constituents.

Easyjet is the biggest faller on the day shedding around 8% at the open despite a fairly upbeat outlook from CEO Carolyn McCall. Despite stiff competition in the short haul market, the company sees forward bookings for the summer in line with that of last year.

A better than expected £7m pre-tax profit aided by lower fuel prices and a weaker euro. Having established a high of 1929p per share at the end of January, the stock price now languishes below 1700p and should this bout of profit-taking continue, may target the bottom of the 2015 range. The likelihood of an even weaker euro versus the pound in the medium term could imply that opportunity may be knocking.

Cable breaks above the 200-dma on supportive production data

The pound pushed above the post-election reaction resistance against the greenback (1.5523) yesterday and has comfortably extended gains above the 200-dma (1.5626) as industrial and manufacturing production grew sensibly faster than expected in March. Growth supportive data revived the speculations for a hawkish BoE before Wednesday’s Quarterly Inflation Report. And indeed, the BoE will likely sound upbeat regarding the recovery in the UK activity. However the monetary stance will certainly remain balanced and may disappoint the BoE hawks, currently dominating the UK market. It is important to note that the BoE has stayed on the sidelines over the past month, to avoid any misinterpretation before the general election. During this period, we have seen an important dovish shift in Fed expectations, which, perhaps is encouraging for the BoE to stay safely on the soft side of the monetary game.

Cable is walking on a tight rope before the QIR. The BoE stance will be determinant for the mid-term direction. Potential consolidation of gains post-QIR will be supportive of a stronger pound, especially if the new Conservative-led government’s fiscal tightening measures get into prices. However, light downside hedges amplify the risk of headwinds should the QIR fail to satisfy the sterling hawks.

Some colour out of Japan

The JPY-complex is better bid as the BoJ seeks permission to keep aside a quarter of its gains on capital to offset potential future losses on its fast growing balance sheet. The BoJ’s initiative to build a safety net raises speculations that the BoJ may be preparing for additional stimulus before the end of the second quarter. However May/June action may too early given the BoJ’s discomfort regarding the fragile Japanese recovery. There is certainly more chance for an action a bit later this year, given that the fiscal and structural dimensions should be discussed seriously and a new game plan should definitely pursue an additional cash injection. Otherwise, the weak Yen will continue weighing on small-medium size business and rise solvability concerns – both negative for a healthy transmission of the excess cash in the economic system to sustainably boost growth and inflation. This being said, the feeling that additional stimulus might be on the wire is supportive of the entire yen complex.

USD/JPY trades above the daily Ichimoku cloud (119.35/79) with limited enthusiasm. While the recovery in US yields offset the limited appetite for weaker JPY, the upside will likely remain capped as the Abe-led monetary stimulus has not been a success story and may prevent the BoJ from taking a sizeable additional step (if any). The option bets are mixed at 120, put options dominate below 119.50. EUR/JPY sees support above the conversion line (133.65), with the 200-dma on the radar as the EUR gains positive traction following the temporary relief on Greek’s payment to the IMF.