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BOE Takes Dovish Tilt

09/05/22 – Weekly Market Briefing

BOE Takes Dovish Tilt

09/05/22 – Weekly Market Briefing

Good morning,

A so called ‘fat finger’ trade led to a €300billion plunge in stock market value within a few minutes on Monday. Dutch, Belgian, and Swedish markets all dipped by more than 5% before a circuit breaker kicked in and all markets subsequently recovered. The ‘fat finger’ trade is by no means a new phenomenon. In 2009, an oil trader, drunk after a golf weekend with colleagues, placed approximately $520 million in trades of crude oil. His company ended up with losses of nearly $10 million. In 2012, Knight Capital submitted millions of trades in under an hour due to a glitch. The result – $440 million in losses, ouch!

Last Week

The Bank of England last week downgraded growth expectations and increased inflation forecasts. Reading between the lines the BOE essentially predicted the UK would be in for a period of prolonged Stagflation. The pound already on the back foot with global markets trading risk-off for the week suffered its biggest sell-off in over two years, crashing by more than 2% in the aftermath. The move came as investors rushed to re-price interest rate expectations on the back of this downgrade. However, with global economy now entering a period of slower growth others could follow, thus giving sterling the chance to recover.

In a week that was all about central banks, the Federal Reserve also convened on Wednesday for their interest rate decision. Conversely to the BOE the Fed maintained their hawkish tilt, for now. The US central bank made their first double point rise in over two decades, moving their base rate to 1%. However, in the immediate aftermath the dollar shed some ground after chair Jerome Powell disappointed markets by ruling out a 0.75% hike for the next two meetings. But the dollar was soon back on the march as markets surmised the US remains streets ahead of their western counterparts. We see the dollar strength story as perhaps nearing its crescendo, this said hedging some of your requirement over the next 6 months would be worth consideration.

As mentioned above markets traded Risk-Off last week. This as signs of distress across global real estate and equity markets as the realisation of the end of a decade and half of free money draws to a close. The Nasdaq – a tech heavy, growth stock heavy bourse – fell into bear territory. After doubling in value in the last two years it would be reasonable to believe that the index could have further to fall as financial conditions continue to tighten. Elsewhere, in the hot Canadian property market, month on month prices fell for the first time in more than a decade, sparking fears a twenty year bubble could be about to burst. Central banks are going to have a difficult time trying to navigate a soft landing, we foresee trouble ahead.

This Week

Several forecasters have recently started to believe that inflation is peaking. This week we can test this hypothesis with the release of US inflation Readings. Any undershoot of expectations may see the Fed par back some of their own interest rate expectations and give other currencies the chance to pull back some recent losses. The dollar index currently trades at twenty-year highs on the basis of aggressive Fed tightening, any reduction in expectations would see investors eager to cash gains.

UK GDP will be released on Thursday and the pound is looking for a strong reading following last weeks cautious approach from the Bank of England. Markets are reportedly still pricing in five 0.25% interest rate rises this year, but a disappointing GDP figure could lead to markets revising their expectations and add selling pressures on the pound.

Key Events

Wed 11th May – All Day OPEC meetings, 13:30 US Inflation Readings

Thu 12th May – 08:00 UK GDP

Have a great week,

The Garton Team.

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