Friday July 15th 2016

Bank Of England

Friday July 15^th  2016

Overview

The Bank of England decided to left its key interest rate unchanged. The nine-member Monetary Policy Committee, led by Governor Mark Carney, voted 8-1 to keep the benchmark at 0.5%; a wise decision if I may say. The British pound surged as much as 1.3474 on the headline as the decision surprised investors, who had priced in more than an 80% chance the rate would be lowered. Nevertheless after the first algorithmic move what we actually read from the minutes of their July 13 meeting is: “Most members of the committee expect monetary policy to be loosened in August,”. “The committee discussed various easing options and combinations thereof. The exact extent of any additional stimulus measures will be based on the committee’s updated forecast, and their composition will take account of any interactions with the financial system.” The pound came off sharply to the 1.33 handle in quite wild and very fast move. The next key event will be the “Inflation Report” that the BoE will release on the 4^th of August which will include new forecasts for growth and inflation and the MPC’s first full take on how the referendum outcome is set to affect the U.K.

Meanwhile, with everyone worried about the Italian/European banking system, on Monday July 11^th we saw the very first tangible Brexit effect: Standard Life Investments declared it had suspended its U.K. Real Estate fund as people tried to get their money back. By Thursday afternoon, seven funds together overseeing about 18 billion pounds ($23.4 billion) had shut the door to prevent unnerved customers forcing fire sales of offices, shopping malls and warehouses. Standard Life had reluctantly suspended its 2.9 billion-pound U.K. Real Estate fund. About 13% of the fund was liquid, but with no let-up in withdrawals its managers froze the assets on July 4 to preserve remaining cash and avoid having to sell holdings on the cheap. It gated a similar property fund during the 2008 crisis. No one really know where the U.K. property prices are going, especially in London where they experienced a very long and sharp rally during the past years. This is gone completely unheard by the financial markets.

Europe is not without problems. Focus is still on the Italian Npls and on the derivatives problem for the Northern Europe banks, Germany “in primis”. The amounts are significant but not dramatic. Necessary though will be for Europe to act like the United States for once and not with the usual German austerity; the risk could be a wider spillover and another credit crunch which we do not really need that at the moment in our fragile Union. I have a feeling though that this time may be different as Bremer Landesbank is risking the default which in turn put Mr. Schauble and Chancellor Merkel in the hot spot. I do tend to agree with Mr. Soros when he says that Brexit may create a "positive momentum for a stronger and better Europe." We shall see.

Equities around the globe seem to be confident that a solution for both Europe and Brexit will be found. Rather stable so far, dragged by the S&P 500 which recorded new all-time highs at 2168 points. Part of the move was definitely due to the great US job report and the continuing Chinese stabilization but traders are also expecting more monetary stimulus ahead.

Market data

This week we had a decent amount of market data releases, especially out of China. On Wednesday we had the Chinese trade balance which showed still contraction in the economy with exports at -4.8% and imports at -8.4%. Nevertheless this morning we saw the first reading of the Q2 Chinese GDP at +6.7% vs exp. 6.6%, the June Ind. Production at +6.2% vs exp. 5.9% and Retail Sales at +10.6% vs exp. +10.0%. The only negative note was the fixed asset investment data at 9.0% vs exp. 9.4%. A bit of a mix picture here that makes investors think more to a stabilization rather than a real pick up in business. The high level of public and private debt is still worrying also considering the New Loans data just for June at +1.4 trillion yuan vs exp. 1 trillion yuan.

Oil traders experienced a big roller-coaster in prices this week as most of the participants are still trying to figure out where exactly the supply side is. The week started on a negative note due to fixings in supply disruption around the world (i.e. Nigeria). Prices managed to recover sharply after the bullish OPEC report released on Tuesday: <<The 14 members of the Organization of Petroleum Exporting Countries, including new member Gabon, will need to produce about 33 million barrels a day next year, 142,000 a day more than June output, the group said in its first assessment of 2017. Global demand will increase at the same pace as 2016 while production outside OPEC will fall.>> The very next day though when the US Crude oil inventories came out we had a big build in distillates +4M vs exp. +0.256M which made the prices drop again. So far we are almost flat on day trading around 46$ for WTI and 48$ for Brent after a minor recovery due to the better than expected Chinese GDP data. A lot of uncertainty.

In Europe is worth noting the very bad Italian Ind. Production data for May at -0.6% vs exp. -0.1% which hopefully will be just a small glitch. Not much else for Europe a part of a stabilizing EU inflation for June at 0.2% vs exp. 0.2%. EUR/USD after a decent appreciation (around 1.1155) due to the unexpected BoE move, today came back again around the 1.1065 level on the back of a better than expect US Inflation 0.2% vs exp. 0.2% and US retail sales 0.7% vs exp. 0.4%. Not doing much lately.

 Metals

Elsewhere in the metal world we are still experiencing some good upside movements despite a stronger US dollar and weaker oil prices. Some analysts are staring to call it overstretched which I do tend to agree on Aluminium and Copper but it may definitely continue in the short term for Nickel and Tin. Zinc despite the good fundamental is probably overdone as well and sooner or later will have to adjust. Anyway, below the always interesting Goldman’s price forecasts.

Goldman Sachs in a note this week predicts Nickel prices to rise at $11,000 per tonne in the next three months, and $12,000 in six months, before dropping back to $10,000 in twelve months. Previously, they had forecast prices would hold at about $8,500. Zinc prices will continue to outperform copper during the second half of 2016 and early in 2017, they added, with a 28% upside in the next six months. Their new forecasts stand at $2,300 in three months, $2,500 in six months and back to $2,000 in twelve months, from $2,000, $2,100 and $2,100 previously indicated. They are very bearish on Copper as producers are still expected to be heading for a tough two years, which will be necessary in order to curb an imminent "wall" of supply, they said. Their three-, six-, and twelve-month copper forecasts remain at $4,500, $4,200 and $4,000 respectively. Aluminium prices are also still expected to fall as a result of a Chinese supply response, but much less than previously forecast, the analysts said. "The main upside risk to our new price forecasts is higher-than-expected coal prices. Our new three-, six-, and twelve-month forecasts are $1,550, $1,500, and $1,500, from $1,450, $1,400 and $1,350," they said.

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