Here are the key questions we are asking at FT Markets for the coming week.
What kind of easing can we expect from the Bank of England?
UK monetary policy is expected to get looser after the Brexit vote easing. So how much room does the BoE actually have to act? A cut in the current 0.5 per cent base rate to at least 0.25 per cent, and a resumption of quantitative easing are favoured by many economists and also the gilts market with 10-year yields at a record low of 0.7 per cent.
A base rate cut to zero may be a step too far as it likely sucks short-dated gilt yields below zero and hits banks, already at risk from a deeper economic downturn. Then there is the pound. Down some 12 per cent post-Brexit vote, the weaker currency has helped soften the blow, bolstering share prices for UK companies with significant foreign revenues.
Plenty for the BoE to think over and the lack of economic data quantifying the hit from the Brexit vote also doesn’t make life easy for policy officials at this juncture. No matter the strong market expectation of an easing this week, there may be something to be said for the BoE waiting a little longer before pulling the trigger.
Will oil break below $40 a barrel?
Black gold has quickly lost its lustre as investors fret anew about a supply glut. The price slide is also exerting pressure on shares and debt prices across the energy sector. The S&P energy sector slipped some 4 per cent in July as the broad market rallied over 3 per cent.
In early June, oil was at its high for 2016 above $50 a barrel. The subsequent 20 per cent decline for Brent and WTI has pulled crude back into a bear market and only intensifies pressure on oil companies and Opec producers. A sustained drop below $40 a barrel would signal the two-year price slide has yet to end and that perhaps even a new low for 2016 beckons.
Where next for global equities?
June was a good month for equity investors with the FTSE All World and leading benchmarks enjoying their best performance since the big rebound of March. So can the market build on its gains and push for a stronger third quarter performance? Beyond the ever present safety net provided by central banks and slumbering bond yields, at some stage the market must decide whether better earnings expectations for the second half of the year are realistic. At the margin, the tone of upcoming data may well continue favouring the US over Europe in terms of equity exposure.
Does the yen rally gather pace?
Reluctance on the part of the Bank of Japan to meet the market’s easing expectations last week fired up the yen. The currency strengthened against the US dollar towards ¥102 after opening the week above ¥106. Further easing remains on the table for September, however such a prospect may not halt renewed strength in the yen, say analysts. Further yen appreciation complicates BoJ policy objectives and most likely weighs on share prices of exporters.
Simon Derrick, at BNY Mellon, makes the point that US dollar has fallen from ¥125 to ¥100 on five occasions during the past quarter century. On two of those occasions the dollar subsequently traded to at least ¥80. “History therefore indicates that ¥100 really is the “line in the sand” that needs to be defended. The question now is what the authorities are going to do to defend it.’’
Will the market find €5bn of fresh capital for Monte Paschi?
The board of Monte dei Paschi di Siena has approved a €5bn recapitalisation plan conditionally guaranteed by a pool of investment banks led by JPMorgan after European stress tests exposed the extent of capital shortfall at the struggling Italian lender.
The bank must first move €50bn of gross non-performing loans into a special-purpose vehicle to be securitised for sale. Together the two-pronged approach should be enough to put the problems to rest and, if successful, should buttress faith in the Italian financial system.
Yet the bank must go back to shareholders who have already stumped up cash three times in the past six years. Even senior bankers admit it is a risky proposition to ask them to reach deeper into their pockets, and investors will be effectively buying a bank on a valuation which hardly screams value.
If they don’t turn up in sufficient numbers, however, the endgame which the Italian authorities have been trying to avoid may result: a swap of debt, some of it held by retail investors, for equity.