A Good Old Risk-On Rally As Another BoE Cut Looms

WHERE WE STAND – While I was throwing an Aston Martin around Silverstone yesterday – or, more accurately, being thrown around said Aston Martin by a professional driver! – it appears I missed a good old-fashioned risk-on day.

Quite why sentiment proved so solid on Wednesday is, frankly, a little beyond me, particularly given the barren nature of the day’s data- and news-flow. In fact, the only notable headline was reports of Apple pledging $100bln worth of investment in domestic US manufacturing which, in turn, will see the firm’s products remain largely unaffected by tariffs that the US have imposed on imports from India.

That news, clearly, proved a positive for equities, with the major Wall St benchmarks closing comfortably in the green, led higher by the tech-heavy Nasdaq. That same news, though, might not be quite such a positive for folk within the States, who might find themselves screwing iPhones together in a few years’ time!

Anyway, when you net off what we’ve seen since Friday’s jobs report, in the equity space, you essentially have four incredibly choppy, and messy, trading days, which leave us basically where we were this time last week. Perhaps, ‘summer markets’ this year shan’t be the subdued drift that we’ve become used to, but instead will prove to be an indecisive mess where thinner than usual conditions spark outsize market moves on a more frequent basis.

That aside, my conviction in the short-term bull case continues to wane, with signs of the US economy cracking beginning to emerge, trade tensions simmering once more, and with seasonality typically dismal at this time of year. While, I acknowledge, that earnings growth has been surprisingly solid this reporting season, that alone may not be enough to prop the market up in the face of those aforementioned headwinds.

Elsewhere, yesterday, Treasuries softened across a steeper curve, though recent ranges continue to be respected at the long-end, as bears wrestled back control at 4.20% in the benchmark 10-year, and at 4.75% in the benchmark 30-year. It’s tough to see those levels breaking for the time being, and my overall bias remains towards a continued steepening of the curve, especially as President Trump appears dead-set on continuing with his ‘unorthodox’ economic approach, and continuing to erode the independence of institutions such as the FOMC.

This should also pose continued headwinds for the greenback, where I remain a bear, and which declined against all major peers amid that broad risk-on vibe yesterday. Selling dollar rallies is still my preferred strategy, with a break back under the 98 figure in the DXY likely to be the catalyst which sees fresh shorts enter the fray once more.

LOOK AHEAD – Happy BoE Day to all! And, in true Bank of England fashion, things are likely to become rather shambolic later on.

The straightforward bit is that the MPC will deliver a 25bp cut, lowering Bank Rate to 4.00%, in a move that would mark this cycle’s fifth rate reduction. That cut is, again, set to be accompanied by familiar guidance that policymakers will stick with a ‘gradual and careful’ approach to further easing, and that policy must remain ‘restrictive for sufficiently long’ in order to bear down on the risks of inflation persistence.

Now, the potentially shambolic stuff. Firstly, the vote split, which is likely to see the MPC split 3-ways as to the appropriate course of action. While the ‘core’ of the Committee (i.e. Gov Bailey & his deputies) will likely vote for a 25bp reduction, external member Dhingra is set to dissent in favour of a larger 50bp cut, while fellow external member Mann will probably instead plump for rates to be held steady. Meanwhile, the Bank’s latest projections are set to see the near-term inflation profile nudged higher, and the short-run growth & unemployment profiles nudged lower. The key question, here, is how prolonged each of these effects is likely to be.

Elsewhere, the weekly US jobless claims stats are due, which will attract extra attention than usual given the dismal July labour market report last Friday, even if neither the initial nor the continuing jobless claims prints pertain to the August NFP survey week. The US also sells 30-year Bonds later on, wrapping up what has thus far been a poorly received slate of Treasury supply this week.