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Research Market strategy
by Swissquote Analysts
Daily Market Brief

Some profit-taking. BoE to announce more asset purchases


Some profit-taking. BoE to announce more asset purchases

By Ipek Ozkardeskaya

Investors hesitate between taking profit and letting the market slip on second-wave fears and carrying the actual rally higher on reassurance that the Federal Reserve (Fed) and other central banks would mobilize more measures to support asset prices. And it seems as today is the profit-takers’ turn to move the markets.

US equity futures are down in Asia after a mixed US session, where the S&P500 (-0.36%) and the Dow (-0.36%) closed in negative as Nasdaq (+0.15%) secured timid gains.

On a side note, we believe that the latest revelations about Donald Trump asking Xi to help him re-win the November election by buying massive quantities of farm products wasn’t a shocker and should have little-to-no impact on market direction, as Trump’s intention in striking the phase-one deal was already clear to investors.

If there is one serious threat to Trump’s victory this year, it is the pandemic that has ravaged the economy as never before and China could do only little to help him get through with it.

Stocks in Asia lacked a clear direction, as unemployment in Australia rose more-than-expected to 7.1% in May, and the New Zealand GDP growth fell 1.6% in the first quarter, versus -1.0% penciled in by analysts and +0.5% printed a quarter earlier.

Activity in FTSE futures (-0.90%) hint at further consolidation after the British blue-chip stocks failed to extend early session gains on Wednesday and closed near flat. Banks and energy stocks which led the morning rally turned negative into the closing bell. News that the UK is planning a ‘shock and awe’ campaign to prepare businesses for Brexit reminds investors that the divorce will happen by the end of this year, come hell or high water. In this respect, especially small and medium sized British companies already battered by the Covid-19 pandemic, may suffer additional economic consequences. This means there is some extra spending for the UK government on the horizon, and the Bank of England (BoE) should throw its pinch of salt to maintain the favourable conditions to support the financial markets.

In the respect, the Bank of England (BoE) is expected to maintain the benchmark rate unchanged at the historical low of 0.10% and to expand its asset purchases program by at least 100/150-billion pound at today’s monetary policy meeting. With plummeting inflation, rising unemployment and lingering risks of a no-deal Brexit, the bank has room and solid reasons to move towards a more unorthodox policy. While the BoE’s near zero rates and massive asset purchases should push the consumer prices higher in the long run, the inflation will probably not be a cause for concern in the foreseeable future.

Given the expectation of QE expansion is fully priced in, the BoE announcement per se may not move the market significantly unless we see a meaningfully different outcome from the BoE meeting or a hint for more policy easing in the foreseeable future.

Cable is flat near the 1.2550 mark, supported by a mostly flat US dollar across the board. A supportive BoE stance will certainly be perceived as a smoother post-Covid and post-Brexit recovery and have a reassuring effect that could keep sterling above the 1.25 mark against the US dollar.

The EURUSD rebounded after testing the 1.12 support for the second time since last week. The euro owes its present strength to a weaker US dollar. Therefore, any rise in USD appetite could pull the pair toward the critical 1.1160 support, the Fibonacci 38.2% retracement which should distinguish between the actual positive trend and a mid-term bearish reversal. Decent offers are eyed near 1.13.

WTI crude trades in a tight range near $38 per barrel. The EIA data confirmed a 1.2-billion-barrel rise in US oil inventories last week. Meanwhile, OPEC left its 2020 demand forecast unchanged at -9.1-million-barrel per day, with 17.3% plunge expected in the second quarter, indicating that the number states find the actual low production regime sufficient to maintain prices. But prospects that a second-wave contamination could further hit the global oil demand should cap the upside near $40 per barrel.

Elsewhere, the Swiss National Bank (SNB) is expected to maintain the status quo and pursue its softer franc ambition via direct interventions in the FX markets.

Gold trades within the $1715/1735 range.

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