Financial Market Review for February 09 2018 In the UK yesterday, The Bank of England (BOE) has signaled the need for interest rate rises earlier and potentially larger than previously predicted, preparing markets for impending higher borrowing costs. In its first meeting of 2018, the Bank's Monetary Policy Committee (MPC) judged that, were the economy to move broadly in line with its projections, "monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period," than anticipated during its last report in November. This would be required to "return inflation sustainably" to its target and over a "more conventional horizon," the report said. Sterling spiked against the dollar on the news as higher rates in an economy tend to favour the local currency with the anticipation of more investment. The pound broke above 1.400 against the greenback after trading close to 1.388 before the announcements. At the same time as the inflation report, the Bank voted unanimously to keep interest rates unchanged on Thursday. The rate decision and hawkish comments come on the back of significantly improved global growth, a modest improvement to the U.K.'s growth outlook and increasing domestic cost pressures as wages look to rise. The BOE noted that the market believes that interest rates could reach 1.2 percent by 2021, suggesting three rate hikes in that period. However, this would still leave inflation above target which hinted at a possible hiking cycle that was quicker than investors were expecting. BOE Governor Mark Carney insisted in his subsequent press conference that any rate moves would be gradual. He added that rates would not move more rapidly, and reiterated this point on several occasions when quizzed by journalists on Thursday. However, he added that the message to markets was that U.K. interest rates could move somewhat sooner and to a somewhat greater extent than previously expected. Moving to the Asian session today, Asian shares sank on Friday, with Chinese equities on track for their worst day in two years, as fears of higher U.S. interest rates shredded global investor confidence. On top of pressure from the drop in global shares, Chinese equities were weighed down as investors sought to stay liquid ahead of the Lunar New Year holidays and pressure was felt to meet rising margin calls. The Shanghai Composite Index tumbled 6.0 percent to its lowest since May 2017, and the blue chip CSI300 index dived as 6.1 percent. Both indexes were on track for their largest single-day losses since February 2016. Japan’s Nikkei shed 2.9 percent, en route for a weekly loss of 8.6 percent - its biggest since February 2016. MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 2.2 percent to a two-month low. The index, which hit a record high on Jan. 29, was on track for its sixth straight day of losses and stood to fall 7.6 percent on the week.
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Financial Market Review for February 09 2018 European shares posted limited losses at the open on Friday after a fresh sell-off on Wall Street, which has now entered a correction with the benchmark S&P 500 and Dow industrials falling more than 10 percent from their Jan. 26 record highs. Europe’s STOXX 600 share index fell 0.4 percent by 0823 GMT with all European bourses and sectors trading in negative territory. The Stoxx had already fallen 1.6 percent on Thursday, with declines accelerating towards the end of the trading day. As for the currency market, For the Aussie Dollar, it was a bad start to the day, with home loans sliding 2.3% in December, far greater than a forecasted 0.9% fall, following November’s 1.6% rise. While owner occupied housing commitments fell by 1%, the total value of investment housing commitments fell by 2.6% in December. The Aussie Dollar slipped from $0.77859 to $0.77746 immediately after the release of the statement and home loan figures, with the RBA expected to remain in a holding pattern through 2018. Inflation figures out of China were also on the softer side, with year-on-year rates of inflation for consumer prices and wholesale prices slowing at the start of the year. Consumer prices rose by 1.5% in January, year-on-year, easing from December’s 1.8%, while wholesale price inflation slowed from 4.9% to 4.3%. The Aussie Dollar showed little response to the numbers however, moving from $0.77846 to $0.77839 upon release of the data. Elsewhere, the Yen gave up early gains against the Dollar, down 0.31% to ¥109.08 at the time of writing, while the Aussie Dollar managed to recover from an intraday low $0.7759 to $0.7780, down 0.01%, with the Kiwi Dollar down 0.07% to $0.7213. For both the Kiwi and the Aussie Dollar, the outlook continues to look bearish against the U.S Dollar, with yield differentials narrowing in favour of the U.S Dollar. With no material stats out of the Eurozone this morning, the markets will be left to consider French and Italian industrial production figures this morning, though we will expect that the EUR will be on the side lines, with focus through the day likely to be on the Pound and the Dollar. While the EUR was up 0.09% to $1.2270 at the time of writing, attention has begun to shift to the terms of the grand coalition, as the markets assess at what cost the coalition has come to Germany and the EU. With Merkel already having lost significant support, could there be a final twist? Across the Channel, it’s another big day for the Pound, with December trade and production figures scheduled for release this morning, together with the NIESR GDP estimate later in the day. Following some particularly hawkish commentary from BoE Governor Carney on Thursday, focus will now be more heavily on the British Government’s progress on Brexit talks, with a bad deal for Britain seemingly the only thing that can prevent a pre-summer rate hike this year, barring an economic meltdown.
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Financial Market Review for February 09 2018 Solid data this morning would certainly help the Pound, supporting Carney’s upbeat assessment of the UK economy, though any noise from Brussels or Westminster will likely overshadow the data. At the time of writing, the Pound was up 0.21% to $1.3967, as the big bets return in favour of a bounce back to $1.45 levels. Across the Pond, there are no material stats out of the U.S this afternoon, with market sentiment towards inflation and FED monetary policy having seen the Dollar Spot Index jump back to 90 levels. While there are no stats scheduled for release, the markets will need to look out for any hawkish FED chatter that could drive yields higher and give the markets another hammering through the session. The Dollar Spot Index was up 0.05% to 90.277, with the Dollar looking bullish for now. Across the border, January labour market data out of Canada will provide some direction to the Loonie, which has certainly pulled back this month, with disappointing inflation figures ultimately doing the damage. For the Loonie bulls, forecasts are for more pain ahead, with the January unemployment rate forecasted to rise to 5.8%, with employment expected to have declined last month. With the Loonie up 0.09% to $1.2592 against the Dollar, direction through the day will ultimately be hinged on this afternoon’s stats, with policy divergence favouring the U.S Dollar for now. View our full economic calendar for a daily roundup of major economic events.
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