Why The FTSE 100 Could Rally On A Bank Of England QE

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Includes: DBUK, DIA, DXPS, EWU, FKU, FXB, GBB, HEWU, IWM, QGBR, QQQ, SPY
by: Christopher Murphy

Summary

The markets have priced in a .25% basis point cut in interest rates by the Bank of England.

All eyes will be scrutinizing the BOE statement for their economic outlook and signs to more QE in the future.

The S&P 500 rallied with the start of the Fed QE. It's possible the British FTSE 100 will rally on the back of a BOE QE.

Investors, corporate executives, and central banks eagerly await the interest rate decision by the Bank of England (BOE) scheduled for Thursday.

Since a .25% rate cut is already priced into the market, the real market mover and volatility will come from the BOE statement by Mark Carney. The market is starving for any details on a potential quantitative easing (QE) package and the length and breadth of that package. Here's why they'll cut and leave the door open for more cuts, perhaps even to negative rates, and more QE.

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Although The Bank of England held interest rates steady at the July meeting, they signaled cuts for their August meeting.

- Monetary Policy Members voted 8-1 to leave rates on hold in July.

"At its meeting ending on 13 July 2016, the MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%, with one member voting for a cut in Bank Rate to 0.25%." - BOE July Statement.

The market was surprised by the lack of action since most had expected - a preemptive interest rate cut following Brexit - as signaled earlier in July by Mark Carney, the BOE president.

Although the BOE did not cut rates, it appears the members still believe an economic slowdown is likely due to Brexit, and a rate cut is imminent.

- MPC members cited Brexit as a concern and expect to enact easier monetary conditions during the August meeting.

most members of the Committee expect monetary policy to be loosened in August. The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round." - BOE Statement.

Typically a central bank will cut interest rates it charges banks to encourage banks to increase lending. And with any bond purchase program if the BOE buys British gilts, and as a result drives down bond yields, investors may take their capital out of the U.K.; but another possibility is that they could pour their cash into British equities.

FTSE 100 could rally on a BOE QE

Immediately after Brexit, the FTSE 100 (Britain's equivalent to the Dow) fell 9%, but after Mark Carney had announced measures to shore up the balance sheets of British banks following the Brexit referendum, the FTSE soared 15% to settle at current levels. And we all know how the S&P 500 performed after the Fed's QE announcement in 2010 (see the chart below).

I think it's going to come down to the BOE statement. If Carney leaves the door wide open for more QE, the pound will be pressured in the coming months. However, if Carney projects a very negative tone and cites substantial risks to the economy, then equities, like U.K. banks, U.S. multinationals with British assets, and the FTSE 100 are vulnerable to down moves.

^FTSE Chart

^FTSE data by YCharts

^SPX Chart

^SPX data by YCharts

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