Geopolitics In Focus As Central Banks Spring Few Surprises

WHERE WE STAND – It’s Friday, and it’s incredibly hot here in London, so I’ll keep things short-ish this morning.

Still, this week’s central bank bonanza wrapped up yesterday, even though market participants remain preoccupied by geopolitical events, and as US desks were out for Juneteenth, thinning conditions significantly. I’d imagine that many Stateside will be out today too, making a long weekend of things.

As for those policy decisions, neither the Swiss National Bank nor the Bank of England sprung any surprises.

The SNB duly delivered the 25bp cut that had been discounted, while reiterating its preparedness to intervene in the FX market as necessary, and maintaining an overall easing bias, leaving a move back into negative territory on the cards at the next meeting in September.

Meanwhile, on Threadneedle Street, the BoE held Bank Rate steady at 4.25%, though in a mildly surprising 6-3 vote, as Deputy Governor Ramsden joined external members Dhingra and Taylor in dissent for a 25bp cut. Such a cut is likely to be delivered next time out in August, where I still believe that the increasing degree of labour market slack, and mounting downside risks, will combine to force a more overt dovish pivot from the ‘Old Lady’, with the prospect of faster, and potentially bigger, cuts on the cards once summer is out.

In contrast to that, the Norges Bank did surprise, with a 25bp cut, the first of the cycle, lowering the deposit rate to 4.25%. At least one further cut should be delivered this year, if the economy evolves in line with expectations. That surprise cut is important from a broader perspective, as the NB had up to now been the last bastion of hawkishness among G10 central banks.

Now that even they have embarked on the journey back to neutral, the doves are well and truly in control of proceedings across the globe. I’ve said before that this isn’t an equity market that needs rate cuts to rally – continued progress towards trade deals, plus solid economic and earnings growth should take care of that – but a bit of policy easing to juice things along certainly wouldn’t go amiss!

Suffice to say, we didn’t see much by way of gains yesterday, with US equities closed, and with stocks elsewhere trading a touch softer as geopolitical concerns continued to exert some pressure. Said concerns also continue to put a floor under both gold and crude, and I imagine that few, if any, market participants would be keen sitting short of either as we move into the weekend, and the risk of an escalation in Middle East tensions remains.

The FX market was also subdued on Thursday, with most G10s continuing to trade in tight, and now incredibly familiar, ranges. The NOK faced some modest headwinds after that dovish surprise from the NB, while both the Aussie & Kiwi took decent legs lower, likely in sympathy with the fragile risk tone. Overall, though, little to write home about here, and my bias remains towards a slow but steady weakening of the greenback over time.

LOOK AHEAD – The week is almost over, and it’s very nearly time for a couple of cold ones in the sun somewhere.

As for today’s data docket, it’s a relatively barren one. We have UK retail sales and borrowing figures this morning, with consumer spending likely to have dropped last month after a strong start to the year, and borrowing again set to remain elevated as the spectre of further tax hikes in the autumn continues to loom large.

Across the pond, the latest Canadian retail sales report drops, while the monthly Philly Fed manufacturing index is also due. The FOMC’s ‘blackout’ period also comes to an end today, so a few speakers could pop up here and there.

Besides that, one must of course be aware of the potential for significant gapping risk at the Sunday night open, depending on how geopolitical tensions evolve over the weekend. Some trimming of risk, and squaring of positions, seems likely as today goes on.