Market commentary: The Bank of England and the UK economy

Although the high hopes of investors on Friday, the rally in equity markets and the start of a timid rebound in European sovereign bonds were short lived, with stocks across the globe posting losses on Monday, while bonds resumed their decline pushing yields higher. 

US stocks retreated after the euphoric effects of a positive jobs report faded away, will the UK’s FTSE 100 witnessed large profits taking after last week’s elections confirmed David Cameron as Prime Minister and fuelled the largest daily advance that British equities have seen since January.

In Europe, stocks opened lower for a second day aimed the ongoing Greek crisis and after the summit held yesterday, although proving positive, did not manage to produce material results, leaving Greece to continue negotiating its way out of an ever worsening financial situation.

On Monday, after a scheduled Monetary Policy meeting the Bank of England announced that it was leaving its main refinancing benchmark unchanged at 0.5% and it would maintain its QE program in place, holding its Asset Purchase Plan at its current level. Investors will surely pay particular attention to BOE’s Chairman as Mark Carney is expected to present the Central Bank’s latest economic forecasts on Wednesday.

While analysts have recently been betting that a Conservative’s win in last week election would pressure the BOE to counter-balance tight fiscal policies with accommodating monetary policies, aimed at keeping interest rates at record low and continuing to supply liquidity to the economy, the Central Bank’s forecasts due this week may picture a different scenario.

In fact, contrary to the rest of Europe that has been struggling to fight off an impending recession and an alarmingly dangerous deflationary environment, UK economy has been growing for the past straight nine quarters, unemployment has been steadily declining and home prices have been soaring to a point that some economists believe they are approaching babble levels.

In this context, if economic data continue to show a strong recovery, the BOE may surprise investors and be forced to follow into the Federal Reserve’s foot-steps by starting to discuss a raise in interest rates ahead of its previously indicated mid-2016 time frame.

A confirmation that the overall UK economy is in a much better shape than the rest of Europe came from the British Government that announced it has sold another large portion of its stake in Lloyds Banking Group Plc, reducing its holdings in the bank below 20%.

The latest sale amounted to around GBP 634 million and it was realized above the average purchase price of 73.6 GBp paid during the nationalization of the bank, showing how the banking and the financial sector in UK is now stronger than the Eurozone banking sector, which is still struggling with legal charges, deleveraging balance sheets and the negative implications of the ongoing Greek crisis.

Including the latest transaction, the UK Government has managed to recover over GBP 10 billion so far, while the recently confirmed Prime Minister has already stated his intention to reduce the State’s holdings further, returning control of the bank to the public, capitalizing on favorable share prices in the process.

In continental Europe, economists are now forecasting a 0.4% GDP expansion, fuelled by the massive liquidity injection financed by the ECB and the indirect positive contribution of multi-year low oil prices that seems to have begun to make their way into the real economy. Should these forecasts prove correct, this would be the stronger growth registered by the Euro area’s economy since mid-2013 and the first time the Eurozone expanded faster than UK since 2011.

This article was issued by Paolo Zonno, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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