News & Views: Wednesday, November 12
What you need to know for today's trading day.
Britain's Bonds Advance After BOE Lowers U.K. Growth Forecasts (Bloomberg)
Regulators fine global banks $3.4 billion in forex probe (Reuters)
BOE Chief FX Dealer Fired as Probe Faults Non-Escalation (Bloomberg)
Russian GDP Seen at Slowest Since 2009 as Oil Adds to Pain (Bloomberg)
U.S., China Reach New Climate, Military Deals (WSJ)
The assets having the largest risk-adjusted gains overnight are due to the Bank of England's (BoE) inflation report, which was even worse than the already low expectations. This report is the equivalent, if not more significant, than the US Fed's quarterly Summary of Economic Projections. BoE Governor Carney said in a speech today that the central bank will reach its 2% inflation target over a three year horizon, not 18-20 months as he had said previously. Additionally, the central bank downgraded its growth forecasts citing the external environment - most specifically the Eurozone - saying that the overall outlook is weaker than in August, that labor slack has narrowed only slightly in the past quarter, and downgraded its outlook for CPI to "close to 1%" in 2015.
The spread between the December 2015 Eurodollar and similar short Sterling future has now contracted to 19bps, meaning that the differential between the two is a little more than two months - or a hike in August of next year - from more than six months in July of this year. The divergence between the two has been present since the taper unwinds during the summer of 2013. However, with the BoE seeing inflation at or near 1% all of next year, then they are not raising rates. It will be hard for the Fed to not be easier than it currently is with the rest of the world downgrading their economic forecasts.
UK Gilts are the top performing asset on a risk-adjusted basis overnight followed by the Pound as the weakest across all assets. European equities seem to be dragged down by the choice words about Eurozone growth. US Treasuries and German Bunds are rising in sympathy to UK Gilts.
Taiwan's equity market is having the largest negative risk-adjusted return in equities overnight and its worse drop since Oct 17. Two tech companies, Lite-On Tech and Quanta, reported very poor October sales with the former seeing a drop of 3% and the latter a substantial shortfall in net income. Certainly this is the "industry contraction" that MicroChip Tech (MCHP) spoke about two months ago that we suspected would show up in the fourth quarter.
US, UK, and Swiss regulators have ordered UBS, Citi, JPM, RBS, and HSBC to pay fines of $3.3bln for FX rigging. That group, including Barclays, has set aside $5.3bln for this probe so this is below what is expected, so far. The Fed is looking into the situation further, as of this morning.
In Germany, the council of "Wise Men" or Council of Economic Experts cut their forecasts for German GDP growth in 2014 and 2015 to 1.2% and 1%, respectively. These are worse than the government's forecats of 1.3% for next year and the lowest by any forecasting organization to date. The report also pushes the German government to continue maintaining its fiscal responsibility and nudges it to do more on the public investment front and "improve the conditions for private investment and innovation" to boost growth. That matches up with the ECB's push for more public investment to boost growth rather than from the monetary side.
- Eurozone industrial production MoM (Sep) up 0.6% vs 0.7% expected, prior -1.4%
- UK jobless claims change (Oct) down -20.4K vs -20K exp, prior -18.4K
- UK ILO unemployment rate (3M) for Sep unchanged at 6.0% vs 5.9% exp, prior 6.0%
- UK average weekly earnings 3M YoY (Sep) up to 1.0% vs 0.8% exp, prior 0.7%
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