Shares fragile, U.S. budget deal puts bonds on defensive
World stock markets remained on shaky ground on Thursday as U.S. bond yields crept back towards four-year highs after U.S. congressional leaders reached a two-year budget deal to raise government spending by almost $300 billion. While the deal was a rare display of bipartisanship that should stave off a government shutdown, it looks set to widen the U.S. federal deficit further and could fan inflation — prompting the Federal Reserve to lift interest rates faster.
BOE Sees Need for Earlier Rate Hikes as Growth Outlook Raised
The Bank of England lifted its forecasts for economic growth and suggested it may need to raise interest rates faster than previously indicated. The Monetary Policy Committee, led by Governor Mark Carney, sees the U.K. growing quicker than its sustainable pace through 2020, meaning there’s a greater risk of overheating. Inflation is projected to remain above the 2 percent target under the current yield curve, which prices in about three quarter-point hikes over the next three years. The MPC agreed that “monetary policy would need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated at the time of the November report,” according to the minutes of its latest meeting published on Thursday. The pound jumped after the announcement and was up 0.8 percent to $1.3995 as of 12:03 p.m. London time. The comments may fan market expectations of a rate hike as soon as May. Bets on such a move increased in the run up to the February decision and a number of economists also now see an increase in the first half of the year. The new outlook from the BOE came as it left the benchmark interest rate unchanged at 0.5 percent. The vote was unanimous, though there was speculation that one or two of the nine policy makers would vote for a hike. In its updated forecasts, the BOE sees growth at 1.8 percent this year and next, up from its November projections. While consumption will remain weak and Brexit is damping investment, global demand is helping U.K. trade, it said.
Everything’s a Sell in China After $660 Billion Equity Wipe out
Investors got a stark reminder of how fast their bets can turn in China, where the most bullish trades are falling apart. The country’s currency was their latest favourite to succumb to a rout that has roiled financial markets around the world this week, losing as much as 1.2 percent on Thursday for the biggest decline since the aftermath of its 2015 shock devaluation. That follows a selloff in large caps and banks that has wiped out about $660 billion from the value of Chinese equities. Traders are running out of places to hide in a nation where market declines have a habit of snowballing. Government bonds are offering little in the way of comfort, and even commodities are feeling the squeeze. Making matters worse is the prospect of seasonally tighter liquidity ahead of the Lunar New Year holiday, according Oanda Corp.’s Stephen Innes. “People are aggressively taking profit,” said Innes, Asia Pacific head of trading at Oanda in Singapore. “They just want to unwind risk and take cash. The slide of Chinese equities in the past few days has definitely had an impact on the currency.”