Forget Brexit, trade the BoE’s upcoming rate war
As noted by Bloomberg, the head of Columbia’s Threadneedle, Ed Al-Hussainy sees no way to successfully trade UK Prime Minister Theresa May’s current slow-motion Brexit crisis, and the only feasible solution is to adjust perspective on the UK and instead focus on the Bank of England (BoE), and its interest rate struggles.
From Al-Hussainy’s perspective though, Carney will probably have to tighten policy and a yield spike could be on the way. The pullback in market pricing shows that traders are focused on the growth risk from Brexit, the Minneapolis-based analyst said, and that they’re underestimating the potential impact on inflation due to factors such as currency weakness, higher import costs and reduced immigration.
“We have no base case — we tried scenario analysis but it’s not working,” Al-Hussainy said of his team’s approach to trading Brexit. “The moment we start assigning probabilities, we’re going to be wrong. Our people in the U.K. are too close to what’s going on, and we in the States are too far away.”
Markets may have to readjust to the prospect of higher rates soon, said Al-Hussainy, as the BOE is unlikely to significantly downgrade its growth outlook in its next set of economic forecasts. He predicts that intermediate-maturity U.K. yields will rise relative to those in the U.S., because the BOE doesn’t have the same luxury of putting hikes on hold that the Fed has — especially if the British currency continues to slide.
To complicate matters, Al-Hussainy said a no-deal Brexit could threaten the haven status of U.K. government debt. “There’s a real risk that if you have a nasty Brexit outcome, this luxury will start to disappear,” he said. “And investors will demand a higher compensation to hold gilts.”
Dollar Flat After Fed Comments; Aussie Slips
The dollar was flat while the Aussie slipped on Tuesday. Comments by New York Fed President John Williams (NYSE:WMB) received some focus as he said the Federal Reserve “will be likely raising interest rates somewhat.”
His comments came after Richard Clarida, the Fed’s newly appointed vice chair, expressed caution over the global growth outlook last Friday and said “that’s something that is going to be relevant” for the outlook for the U.S. economy.
Federal Reserve Bank of Dallas President Robert Kaplan also said in a separate interview with Fox Business last week that he expected a growth slowdown in Europe and China.
The U.S. dollar index that tracks the greenback against a basket of other currencies traded 0.06% higher to 96.2 by 12:42 AM ET (05:42 GMT).
Although not a directional driver, data showed on Monday that the National Association of Home Builders/Wells Fargo Housing Market Index fell eight points to 60 in November. That was the lowest reading since August 2016, though a reading above 50 is still considered positive.
The AUD/USD pair was down 0.3% to 0.7273. Minutes of the Reserve Bank of Australia’s (RBA) November policy meeting on Tuesday showed policy makers expect above-trend growth in 2018 and 2019, supported by interest rates at a record low 1.50%.
Stock Market News
Tech Rout Threatens Hong Kong Stocks’ Biggest Comeback Since ’12
Hong Kong stocks extended declines, threatening to derail what had been a dramatic comeback in its equity market as another slump in global tech darkened sentiment.
The Hang Seng Index fell 1.8 percent by the midday break Tuesday, tracking losses in the Nasdaq 100 Index overnight, with technology and pharma stocks among the biggest losers. A gauge of China stocks fell 1.6 percent, led by CSPC Pharmaceutical Group Ltd.
Hong Kong’s equity benchmark had advanced 5.6 percent in November through Monday, rebounding from its worst streak of monthly losses in 36 years. Its month-to-month turnaround — the biggest since June 2012 — has made it the world’s best performing benchmark, despite a relatively lackluster quarterly earnings season.
After tumbling into a bear market in September, Hong Kong’s stocks have struggled to find a floor. Caught in a U.S.-led tech sell-off, a slump in the yuan, a trade dispute between Beijing and Washington, souring sentiment for emerging markets and one of the worst years ever for stocks in mainland China, the city’s traders have barely had a moment of calm. They’ve endured declines exceeding 2 percent for the Hang Seng Index on 14 occasions this year, the most since 2011. Last year, drops of that magnitude happened only twice.
Last week’s better-than-expected results from Tencent Holdings Ltd. had helped improve sentiment, bringing volatility down from the highest level since 2016. The mood was so bearish in October that investors were blindsided by a massive short squeeze at the start of this month, a reminder of how one-directional the market had become.
Tuesday’s losses show how most problems afflicting global investors in 2018 have found a foothold in the Hong Kong. Its largest companies generate the majority of their sales from a slowing China, while the city’s dollar peg ties it to tightening U.S. monetary policy.
Stock markets slide on tech sell-off, dollar sags
The dollar sagged after weak U.S. data further sapped confidence in the currency, while oil prices slipped despite expected OPEC supply cuts.
Spreadbetters expected European stocks to open lower, with Britain’s FTSE falling 0.1 percent, Germany’s DAX losing 0.5 percent and France’s CAC dipping 0.3 percent. U.S. S&P mini futures were down 0.3 percent.
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1.2 percent.
Tech stocks were under pressure across Asia following U.S. losses. In Seoul, Samsung Electronics fell 2 percent and SK Hynix Inc dropped 3.5 percent, while Japan’s Tokyo Electron was down 1.8 percent, Advantest lost 2.7 percent and Sony Corp shed 3.1 percent.
U.S. stocks came under heavy selling on Monday, with Nasdaq tumbling 3 percent, as investors dumped Apple, internet and other technology shares. Conflicting signals between the United States and China on their trade dispute added to caution. [.N]
“The drop by U.S. stocks will cut short any attempt by equity markets to mount a sustained bounce. Investor sentiment has been subdued by lingering weakness in U.S. technology shares,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo.
Japan’s Nikkei slipped 1.1 percent, with shares of Nissan Motor Co tumbling than 5 percent after its Chairman Carlos Ghosn was arrested on Monday for alleged financial misconduct. He will be fired from the board this week.
“This incident will make investors review if Japanese corporate governance is working,” said Toru Ibayashi, executive director of Wealth Management at UBS Securities Japan.Elsewhere in Asia, the Shanghai Composite Index retreated 1.7 percent, Australian stocks lost 0.4 percent and tech-heavy South Korean shares dropped 1 percent.
Global stock markets have suffered a sharp shakeout in the past two months, pressured by worries of a peak in corporate earnings growth, rising borrowing costs, slowing global economic momentum and international trade tensions. Trillions of dollars were wiped off equities in a particularly torrid October month.
Bitcoin breaches $5,000, plumbs fresh 13-month low
Bitcoin fell below $5,000 on Monday for the first time in over a year, slumping to a fresh 13-month low on the Bitstamp platform as a broad sell-off in cryptocurrencies sparked last week gathered momentum.
As of 1645 GMT the original cryptocurrency was down 8.7 percent at $5,100, after breaching the landmark for the first time since Oct. 12, 2017.
Traders said selling was largely sentiment-driven and cited fears that Thursday’s “hard fork” in bitcoin cash, where the smaller coin split into two separate currencies, could destabilise others.
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