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Central banks were the catalyst for massive market moves yesterday. Both the Bank of England and the Federal Reserve made comments that the market wasn't expecting and the reactions were huge.
The Bank of England were the first up, and the minutes from their last meeting showed that the number of voters for quantitative easing increased, along with news that they had discussed a further interest rate cut. It was the latter that sent Sterling on another nose dive, falling more than a cent instantly and continuing its move lower, breaking all kinds of technical support barriers along the way. The FTSE rallied on the prospect of more easy money in the system, putting on half a percent in value in little over half an hour. The talk of more QE and the possibility of a further rate cut clearly demonstrated how a central bank should go about talking down their currency without actually intervening in markets. The weak Pound is likely to boost exports in coming months, having lost 7.5% of its value this year against the Dollar and the Euro, meaning Sterling denominated products are particularly attractive to overseas purchasers. The flip side to that coin is how cheap buying a British company now looks to a foreign investor, and though foreign investment is broadly welcomed, caution is necessary to ensure we don't give away today what we could really do with tomorrow.
Of course, any boost to the economy and the avoidance of a triple dip recession during Mervyn Kings final months in the job are going to make for a much better lasting legacy, a fact that clearly hasn't escaped Sir Mervyn's thoughts. The minutes yesterday sound a lot like the Bank of England front running Mark Carney's planned monetary policy changes later on in the year, let's just hope they bear fruit.
In the US, the Federal Reserve gave a much more hawkish tone in their minutes than the market was expecting, causing a different kind of reaction, though for the Pound it meant more selling. Some FOMC members are now of the opinion that their QE purchases should be varied month by month and that there was now a broader concern about the costs involved in getting out of QE further down the road and whether those future costs outweigh the present benefits.
The prospect of no longer getting a free ride on the government's coat tails led to a heavy sell off in stock markets, particularly Asian bourses. Shanghai led the charge lower, cutting almost 3% off its overall value. Sterling was hit again on the risk off sentiment and has pushed below 1.52 versus the Dollar for the first time since mid 2010. Gold hit a seven month low on the stronger Fed sentiment. Gold is a hedge against inflation and also a safe haven against risk, both of which are less of a worry after what the Fed had to say. European stock markets will be playing catch up this morning too, as futures indicate an open lower of between 0.5 and 1%.
In other news Oil got hit hard yesterday, losing four cents a barrel in minutes, after speculation that a large hedge fund had blown up. The news, as yet unconfirmed, was enough to put pressure on industrial metals and other energy futures too, but so far nothing has been confirmed.
Today is very data heavy, so no likely let up in volatility. Starting in Europe with French, German and European composite Purchasing data and then moving onto how much George Osborne had to borrow last month. Later on the US will announce jobless claims, inflation, home sales, Philly Fed index, leading indicators and a host of energy inventories. So whichever market affects you, brace yourselves.
Thank you CM Trading
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