CAPITALDIGEST MARKET REVIEW, 11/11/2024

POUND, UK STOCKS GET A LIFT FROM BOE’S ROSY RATE VIEW

Sterling rallied sharply on Thursday, solidifying its position as the best performing major currency of 2024, while UK-focussed stocks rose after the Bank of England cut rates but indicated future cuts may be more gradual than many had thought.The BoE, which delivered its second rate cut since 2020, said that after Labour Party finance minister Rachel Reeves’ high-tax, high-spend budget last week, it expected higher inflation and growth. London-listed shares of mid-sized companies touched session highs .FTMC, while UK government bonds headed for their best one-day performance in almost a month, reflecting investor demand for sterling-denominated assets. Sterling rose by as much as 0.78% to $1.298 after the decision GBP=D3, while two-year gilt yields fell 6 basis points to 4.448%, as bond prices rose GB2YT=RR. The Monetary Policy Committee (MPC) voted 8-1 to cut rates to 4.75% from 5%, a stronger majority than expectations in a Reuters poll for a 7-2 vote in favour of a cut. The BoE predicted last week’s budget, which contained big increases in tax, spending and borrowing – would boost the size of Britain’s economy by around 0.75% next year but barely improve annual growth rates in two or three years’ time. It said the budget was likely to add just under half a percentage point to the rate of inflation at its peak in just over two years’ time, causing inflation to take a year longer to return sustainably to its 2% target.

DOLLAR DROPS AS FED CUTS RATES, TRADERS UNWIND SOME TRUMP TRADES

The dollar held onto earlier losses on Thursday after Federal Reserve Chair Jerome Powell failed to offer any strong clues that the U.S. central bank was likely to pause rate cuts in the near-term, after a widely expected 25 basis point reduction. Traders also closed out some profitable bets on a Donald Trump presidency after his election victory on Tuesday. Fed policymakers took note of a job market that has “generally eased” while inflation continues to move towards the U.S. central bank’s 2% target. A much stronger than expected jobs report for September raised expectations that the Fed may make fewer rate cuts, though was followed by surprisingly weak data for October. Analysts said that jobs gains last month were hurt by hurricanes and labor strikes. In Powell’s comments “there was no indication that a pause is under consideration at the Fed. It sounds like they want to get below 4% or very close before thinking about pausing. That’s a surprise given the strength of economic data,” said Adam Button, chief currency analyst at ForexLive in Toronto Powell also said that the election won’t impact Fed policy in the near-term, saying the U.S. central bank won’t speculate on how policies will affect Fed goals. Traders are pricing 75% odds the Fed will cut rates again in December, up from 69% on Wednesday, according to the CME Group’s Fed Watch Tool.

STERLING CLOSE TO 2-1/2-YEAR HIGH VERSUS EURO ON POLICY RATE BETS

Sterling was within striking distance of its highest level in more than 2-1/2 years against the euro on Friday as investors bet the European Central Bank would follow a faster monetary easing path than the Bank of England. The BoE cut interest rates on Thursday for the second time since 2020 and said future reductions were likely to be gradual, as it predicted the British government’s first budget would lead to higher inflation and economic growth. Last week’s budget, with its heavy borrowing and spending, prompted investors to dial back their bets on the pace of further rate cuts. Investors expect the ECB to be more dovish than the BoE as the euro-zone economy is likely to be hit harder than the UK’s if incoming U.S. President Donald Trump implements higher tariffs when he takes office on Jan. 20. However, analysts’ views about the BoE easing path and its impact on the British currency remained mixed. “We think there is a gap to be filled on the dovish side in the Sterling Overnight Index Average’s (Sonia) curve,” said Francesco Pesole, forex strategist at ING. SONIA is the risk-free reference rate for the sterling market.

CANADIAN DOLLAR FALLS AS JOBS MISS KEEPS JUMBO RATE CUT IN PLAY

The Canadian dollar weakened against its U.S. counterpart on Friday as oil prices fell and domestic employment data supported bets for another outsized interest rate cut by the Bank of Canada next month. The loonie was trading 0.5% lower at 1.3925 to the U.S. dollar, or 71.81 U.S. cents, moving back in reach of the two-year low it hit on Nov. 1 at 1.3959. Canada added 14,500 jobs in October, fewer-than-expected, and wages of permanent employees rose as the economy struggled to absorb the slack built up due to a rapidly increasing labor force.”Odds on a 50-basis-point rate cut at the Bank’s December meeting are holding just above coin-toss levels, and the rate differential between U.S. and Canadian ten-year bond yields remains extremely wide relative to history, helping put sustained pressure on the loonie,” Karl Schamotta, chief market strategist at Corpay, said in a note. Investors see a roughly 60% chance the BoC would cut on Dec. 11 by a larger than usual half percentage point for a second straight meeting.The gap between the Canadian 10-year yield and the U.S. equivalent was trading at about 112 basis points in favor of the U.S. note, nearly the biggest gap in LSEG data going back to 1994.

EURO HITS LOWEST SINCE LATE JUNE VS DOLLAR ON TARIFF WORRIES

The euro hit a 4-1/2-month low against the U.S. dollar as investors worried about possible U.S. tariffs which would hurt the euro area’s economy. The greenback was within striking distance of the levels seen right after the U.S. presidential election against major currencies as markets focused on data and Federal Reserve speakers and waited for clarity about future U.S. policy. Analysts expect measures from President-elect Donald Trump to put upward pressure on inflation and bond yields while limiting the Fed’s scope to ease policy. However, they see investors trading on economic data and clues about the rate outlook before seeing what Trump’s policies would actually be in practice. Market participants flagged that the sensitivity of the euro to the threat of higher U.S. import tariffs was evident late Friday, when media reported that Trump was lining up Robert Lighthizer, seen as a hawk on trade, to run his trade policy.However, two sources familiar with the matter said Lighthizer has not been asked by Trump to return to the agency overseeing trade policy. The single currency was down 0.3% at $1.0685, after hitting $1.0679, its lowest level since late-June. “The thesis for dollar bears now is that it will take a while for tariffs to come through and the Fed recalibration to less restrictive monetary policy,” said Chris Turner, head of forex strategy at ING. “We disagree and think this clean election result can boost US consumer and business sentiment at the same time as it weighs on business sentiment elsewhere in the world,” he added.