Market Commentaries

Throwback to more of my market summaries…

16th June 2014

The price action today pretty much summed up the year. Global markets (in general) very well bid with equities and bond markets soaring – again boosted by a central bank. This time the FOMC. For me the statement, projections and press conference were not overly dovish but again indicate no rush to begin tightening policy. Of course the market has reacted to the recent stronger data and gotten itself short bonds (and in truth no one can be long at these levels) and we have seen the typical short squeeze grinding rally in the aftermath. Over in the UK, of course we have been dragged higher, with gilts up half a point at one point and the strip up 4-5bp. All this changed by early afternoon however with (rapidly progressing) events seemingly catching up with the market. Overnight we had some hawkish comments by new MPC member Andy Haldane who said (seemingly following in Mervyn Kings footsteps using cricketing metaphors) that the odds at present favour a front foot response (ie a hike this year), this was followed by a strong CBI trends survey (retail sales earlier on was about in line) and then further hawkish comments from McCafferty, who said the bank shouldn’t hold back rate hikes for too long. All this seemed to start gradually weighing on the market, at first stalling out the rally and then seeing prices collapse with short sterling closing down 3bp and gilts back to unchanged (way under a turbo charged bund which took out recent highs in a 70 cent rally). We think the prospect of hikes now being on the table is finally starting to register and barring any breakdown in the data we feel it will be hard to see lower yields in the UK from here…

8th April 2014

After the positioning inspired rally of the last couple of trading days, the focus returned to the extremely strong economic recovery in the UK today. The industrial and manufacturing production figures for Feb came in much stronger than expected which bodes well for Q1 GDP (the NIESR estimate for Q1 also printed 0.9% this afternoon). This caused a decent sell off in the strip (from what would have to be said are lofty levels) with the green down 4-5bp. Overnight we had already received a couple of decent data prints. The KPMG/REC survey showing the highest growth in permanent salaries for 7 years, a similar story in the vacancies index and the lowest print seen in the availability of permanent staff index. Alongside this, the BCC survey for Q1 showed home sales, investment, orders, services exports at new highs and the proportion of service companies reported as working at full capacity at the second highest on record. All in we would say the biggest surprise was that the strip didn’t see bigger losses…..along with the short positioning we seem to be supported by a variety of factors – namely the recent weakness in equities (although we would say this is primarily very rich tech/growth stocks), some dovish FED comments ydy and continued comments/rumours of the ECB looking to instigate QE (we continue to be firmly in the camp that this is mere jawboning. We believe we are a long long way from seeing anything along these lines. If anything, the first thing they would try is something along the lines of tinkering with capital rules to try and get bank loans flowing more efficiently. We don’t think they are likely to react to a low spot inflation print aggressively when they know full well monetary policy acts with a 2y+ lag). For us, the market looks rich and we are happy to be cautiously short. We think the biggest risk at this juncture is the price action in equities deteriorating and losses becoming more broad based. To that end, the Q1 earnings season (which starts tonight) is going to be key. Given that expectations have been lowered substantially over the last few weeks we think there’s a fair chance we see a lot of ‘beats’ in the coming weeks. This will allow the market to settle somewhat and remove one of the supports for bonds (and people can again concentrate on the improving data). We don’t think we will see a huge bond sell off in the near term, for that we need to see wages going higher. This will come (we are seeing the first signs of this in the surveys) and 3-6 months from now we believe the MPC will be playing a completely different tune.

25th Feb 2014

Another quiet session in terms of flow but interesting as far as moves are concerned. Early comments from MPC’s McCafferty, combined with weekend comments by Broadbent and Weale (again), continue to show the MPC’s strategy as to how to handle rate hikes: all three members pointed out that rate hikes, when they occur (spring 15 seems to be the likeliest of options), will be small and gradual with emphasis being made on the value of the pound and the strength of the recovery. As we mentioned last week, this is the kind of comment we expected to see in the minutes and it is now clear that the BoE wants to start introducing the idea of a hike gradually to stop the market getting ahead of itself. Greens were off as the comments hit the wires with greens coming off as much as 4bps with some again positive UK data (CBI sales highest since June 2012) adding to the pressure. But some concern from early US traders brought some support back in as consumer confidence numbers disappointed. Eyes switch to tomorrow’s GDP print…