London Open: The Bank of England in focus ahead of monetary policy announcement

Market Analysis / 4 Min Read
Stephen Innes / 18 Jun 2020

Bank of England

The Bank of England's monetary policy announcement (midday BST) is the leading market event today. Going into the meeting, traders’ consensus is a bit muddled where long GBP positions are unattractive, although long EURGBP is more attractive than short GBPUSD. 

In other words, the market prefers to express a bearish Sterling bias via the EURGBP longs. Ultimately it makes sense to eliminate the fickle nature of the US dollar these days which is moving in and out of recent correlation, making it tricky to trade on an outright basis.

The street expects the MPC to announce a further GBP100bn of asset purchases in addition to the GBP200 bn announced in March, with the weekly pace of asset purchases slowing to GBP8-10bn from GBP14bn currently. Although the market consensus is for the bank rate to be left unchanged at 0.10%, an active discussion of the possibility of negative rates could undermine GBP and it's on this narrative where the bearish price action could evolve. 

The street uniformly agrees that the BoE increasing the pace of asset purchases or moving into  negative rates makes much more sense for the UK economy than yield curve control, as only a small proportion of systematic borrowing in the UK is related to 10-year yields.

Oil Markets 

The OPEC+ technical committee that met today didn’t make any additional recommendations for further production cuts, focusing instead on members' compliance with the current agreement, according to OPEC+ sources.

I’m not sure this is much of a factor in the overall scheme of things – after all, we’re only one month into the latest extension.

Most of the focus remains on demand uncertainty, starting with nascent Covid-19 economic recovery which was getting framed by crude stocks building counter-seasonally, but gasoline and diesel drew US crude production declines to 2018 levels due to tropical storm Cristobal. The DPR report shows total wells completed in May stood at just 461 – down 57% since March.

Asia Wrap: The market has turned decidedly cautious on the latest fashionable headlines from the Korean peninsula

While investors are preoccupied trying to balance the resurgence of Covid-19 versus the combined firepower of global central banks around the world, the market has turned decidedly cautious on the latest fashionable headlines from the Korean peninsula.

While the resurgence of Covid-19 in the region seems to be the overriding concern, traders have also turned their sights to reports of air traffic formations. A plane often used by North Korean leader Kim flew from Pyongyang to the eastern part of the country on Wednesday, sparking speculation he may oversee military action.

Until yesterday's deadly India-China border clash, I never thought we’d see combat – even of the primal variety with clubs and bats since guns are forbidden. It just points to how much I, along with other market participants, underestimated the propensity for action between regional superpowers.

And with the US extending existing sanctions on North Korea by one year due to the continued "unusual and extraordinary" threat, these actions are likely to see the North Korean leader even hotter under the collar. One can never completely rule out a tactical blunder. 
So, with Covid-19 filling the airwaves and geopolitical angst dotting the Korean landscape, the market is taking a decidedly defensive posture in this morning’s Asia session. It seems almost a carbon copy of yesterday's session as Asian markets are putting in a rather limp performance today, considering the favorable tailwind via an expected PBoC policy pump later in the month with the HSI opening down -200 points.

The PBoC 

There was some market chatter yesterday that the PBoC is likely to do 62d reverse repo soon. As it turns out, the PBoC conducted a small 14-day reverse repo this morning (likely to cover the half year-end; net injection of CNY40 bn). I think funding could still remain supported with mid-year demand, but fwd./fwd is expected to remain under selling pressure. 
The PBoC cut its 14-day reverse repo rate to 2.35% from 2.55% (Bloomberg). USDCNH swaps are selling off, with 1y down to 1240, and the USDCNH popped to 7.0850 before local sellers emerged. 

But it's pretty puny in the broader scheme of things and will do little to sway sentiment as this injection is to ease mid-year funding concerns and grease the wheels of the market, as opposed to what’s really needed: getting money in the hands of the folks that need it the most.

Bolton Impact

At first blush, I did n’t make much of the John Bolton book story as the market already surmised the trade deal was little more than an election ploy anyway. Plus, I think it’s far too early to speculate on what a Democrat presidency could look like for markets if the polls continue to move in Joe Biden's favor. Billionaire hedge fund manager Paul Tudor Jones is the latest to offer a view, seeing a tax hike of 2-3% of GDP if the Democratic candidate wins.

But with the wall of money argument and questionability surrounding whether a Biden presidency will be all that bad for the market – after all, the democrats will be replacing a regime that continued to struggle in the domestic and foreign spotlights – one could get their fingers severely burned

Follow me on Twitter: @Steveinnes123

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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