It has been a tumultuous 48 hours for markets but most of the price action has been in US equity and rates markets.
On Wednesday evening, in line with expectations, the Federal Reserve cut its policy rate 25bp – the first cut in over a decade. While Chairperson Powell left the door ajar to another rate cut, he fell well short of telegraphing the likelihood let alone timing of another cut. US equities sold off, with the S&P 500 falling over 1%, and markets cut their pricing of further rate cuts before year-end to just 25bp.
The S&P 500 rebounded on Thursday to its pre-rate cut level only to tank 2% after US President Trump announced late last night that a new 10% tariff on $300bn of US imports from China would come effect on 1st September. Trump signalled that this tariff could be hiked further and Chinese officials have responded with a threat of similar tariffs on imports from the US. The risk to US and global economic growth saw Wednesday’s post-FOMC meeting rates price action reversed and markets are once again pricing two full Fed rate cuts before end-2019. On the currency side, the main beneficiary, perhaps unsurprisingly, has been the safe-haven Swiss Franc with the USD/CHF cross down to a one-week low of 0.985.
The news and dataflow out of the UK has been uniformly negative in the past few sessions and yet the GBP/USD and GBP/EUR crosses have been broadly stable around respectively 1.21-1.215 and 1.09-1.095.
The Bank of England yesterday published its quarterly inflation report in which it revised down its 2019 GDP growth forecast to 1.3% from 1.5% and it again warned of the cost to the UK economy of a “no-deal” Brexit. The manufacturing PMI in July was unchanged from June at 48.0, a multi-year low, the first indication that GDP – which the Bank of England forecasts was flat in Q2 in quarter-on-quarter terms – remained very weak in early Q3. Moreover, the ruling Conservative Party lost one parliamentary seat
following a by-election won by the pro-EU Liberal Democrat Candidate. The Conservative-DUP alliance now has a working majority of only one seat in the House of Commons which could it make harder for Prime Minister Johnson to get a Brexit deal through parliament.
