The Wisdom of Crowds: BOE Edition

In what has been a great month for market consensus expectations, the Bank of England (BOE) surprised investors by leaving rates on hold last night.

Bank of England
Source: Bloomberg

This saw an initial surge in the pound as the high frequency trading algos sought to purge the market of all who were short, but the pound pulled back to close the session up 1.5%. This initially hit equity markets, but the statement made it clear that “most members of the Committee expect monetary policy to be loosened in August” and the prospect of future easing salved equities and most markets subsequently rallied strongly higher. It appears that the BOE is waiting for a better gauge on the impact of Brexit on the economy to calibrate their measures appropriately. The August meeting also times with the release of their Inflation Report round.


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The other big news overnight was J.P. Morgan’s stronger than expected results, earnings-per-share (EPS) was US$1.55 against expectations for US$1.43. Profits were only down slightly from 2Q last year and revenues were slightly higher, driven by strong trading activity and loan growth. This helped see the stock rise 1.9% and reassured investors that US bank profits were not completely shrivelling up in the low interest rates environment. Financials as a whole rallied 0.9%, and banks 1.7%, which did the heavy lifting to help the S&P 500 close up 0.5% at 2164. This not only marks another new all-time high, but also the longest winning streak for the SPX in four months.

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There was also a solid 0.5% month-on-month gain in US PPI for June, showing the nascent tendrils of recovery in US industrial inflation. This marks the third month in a row where US PPI inflation has continued in positive year-on-year territory. Taken alongside the recovery seen in US manufacturing PMIs, this all bodes well for the steady recovery of the US industrial space.

The Asian session is set to be dominated by the big Chinese release of GDP, industrial production, retail sales and fixed asset investment. Real GDP is expected to ease to 6.6% YoY in 2Q after 6.7% in 1Q, but then again that Chinese GDP deflator does have a tendency to “surprise”. On 5 July, China’s National Bureau of Statistics (NBS) also announced a change to its GDP calculation by treating R&D as part of its capital formation calculation, which saw it revise up 2015’s GDP by 1.3% to 11 trillion USD. The NBS hasn’t clarified on whether 1Q GDP was now 2.8%, which would make sense under the new calculationsl, but there does certainly seem to be upside risk to today’s GDP release.

Asian markets are all set to open higher today in the wake of the strong US session. Risk sentiment is strong with the VIX pulling back to 12.8 and gold and silver declining 0.7% and 0.4%, respectively. The commodities complex saw further gains overnight, including a 1.6% jump in WTI oil. The strong performance by US financials in the wake of J.P. Morgan’s earnings beat should help the Aussie banks today, whilst the rallies in commodity spot prices should help the materials and energy sectors. We expect the ASX to open up 0.4% higher, and it could soon have its eye set on recovering the 5500 handle for the first time in almost 12 months.

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