BOE's Turn: The Race To Zero Continues

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Summary

The big news today was the BOE decision to cut interest levels to 25 bps.

This has had an aftershock effect, causing the pound to weaken vs. the Dollar.

Yields are falling as well as investors continue to chase whatever yield they can find.

8/4/2016 12:45 AM

Top News

Today, the Bank of England cut its interest rates from 50 bps to 25 bps. Additionally, it downgraded the growth prospect of the country for 2017 to 0.8% from 2.3%. Mark Carney also announced a new Term Funding scheme worth about £100 billion, purchases of about £10 billion in corporate bonds and an increase in QE £60 billion to £435 billion. This was all in an attempt to get ahead of any potential economic impact Brexit might have economically for the country.

As a result of these measures, the Pound is falling today, down nearly two handles to 1.31 vs. the Dollar. Further, we see a decline in the UK Bond market as its 10-year is down 14 bps to a yield of 66bps. The FTSE 100 rallied 1.6%, and the rest of Europe followed the FTSE's lead. These market movements we see following the BOE's decision do make sense. More easing and QE is helping to push the market higher while pressuring yields and currency.

The Global Race to Zero is on, and it was the BOE's turn to get into the action. For anyone who thinks we are in a rising interest rate environment or that the Fed is in a normalization process, you will be saddened to hear that we are not. Rates will continue to head lower; global Central Banks are in a race to keep rates low and push them even lower. The hope is to create a weak currency to help boost exports and get their respective economies moving again. This is the main reason the Fed can't raise rates. If you think raising the Federal Funds rate 25bps doesn't matter, it does. It will cause the Dollar to strengthen materially vs. other currency, ultimately hurting the US economy. It is a race to devaluation, and we are stuck in this game.

Equity Market

The S&P 500 (NYSEARCA:SPY) is trading up by 2 points this afternoon to 2165. I have to say I haven't seen anything like this in quite some time. I really cannot remember a time where a market has traded in such a tight range for so long.

The VIX index is showing the same complacency as the S&P 500. It would seem for now everyone is in la la land. How long this complacency will last is a real question. Given all the volatility in the first part of the year, my guess is this doesn't last for too much longer.

When we look at the chart of the S&P 500, we can see that we hit the resistance level right around the 2170 and sold off it. I decided to draw in a trendline notated in red. Could this be the start of something more to the downside? Maybe, but it is too early to tell yet.

Sector Spotlight

Despite all the complacency on the surface, the currents are still churning below it. The "risk-on" sectors like the iShares Nasdaq Biotech ETF (NASDAQ:IBB) is flat, and the Technology Select Sector SPDR ETF (NYSEARCA:XLK) is up about 50 bps. While the "risk-off" sectors like the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) and the Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) are trading up slightly, 21 bps and 17 bps, respectively. The "risk on" sentiment remains intact.

Despite the dollar strengthening, Oil is up $1 to $41 and that is taking the Energy Select Sector SPDR (NYSEARCA:XLE) higher by nearly 25bps, the ETF had been lower during the morning.

Yield

Coming as no surprise the 10-year Treasury yield is trading lower today as well. With the BOE cutting rates, foreign investors will have to find yield somewhere, and that is what is happening today, with the 10-year yield falling five bps to 1.48%. Let us think about this mechanically. A foreign investor would need to sell local currency, buy dollars and then could buy our bonds.

The effect, a stronger dollar, lower yield, which is what we see today. We talked at the top of this article about 10-year UK bonds yield 0.66%; this makes our bonds very attractive at 1.48%. This would mean only one thing for the direction of our bonds, lower. Rates will continue to fall in our country as long as Central Banks around the world keep the pedal to the metal on easing.

Lightning Round

WTI Oil: -0.01 to $40.Still holding $40.82, which is a positive

Upcoming Events (From Estimize)

  • 8/5 Unemployment Rate (U3) 4.8%
  • 8/5 Change In Nonfarm Payroll 216k
  • 8/5 Average Weekly Earnings 0.23% MOM

Election 2016 (From Real Clear Politics)

The polls have shifted heavily towards Clinton. The latest Fox News poll has Clinton up 10 points, 49 to 39 over Trump. With the RCP average now having Clinton up 5.9 points on average, 47.4 to 41.5. Clinton has either gotten herself a boost following the DNC or Trump is hurting himself. Whatever the case, the tides have turned quickly in Clinton's favor. We will need to keep note of this. Remember this risk-on shift started to occur around the same time Trump had taken the lead over Clinton.

Market Snapshot

Risk Metric: On/Off ON

Oil +1 to $41.82

S&P 500: +2 to 2165

Gold +$4.40 to $1369.50

10-Year Treasury -5 bps to 1.49%

Copper -0.0385 to $2.16

Dollar Index +0.13 to 95.70

VIX -0.63 to 12.23

Euro -0.0014 to 1.1135

iShares Nasdaq Biotech ETF -$0.44 to $297.48

Yen -0.11 to 101.12

Technology Select Sector SPDR ETF +$0.24 to $46.58

Pound -0.2 to 1.3126

Utilities Select Sector SPDR ETF +$0.10 to $51.60

RMB +0.0023 to 6.6459

Consumer Staples Select Sector SPDR ETF +0.08 to $54.56

Summary

The big news today was the BOE's decision to cut interest levels to 25 bps. This has had an aftershock effect, causing the pound to weaken vs. the dollar. Additionally, yields are falling as well as investors continue to chase whatever yield they can find. At this point, the equity markets are quiet once again, a trend that is becoming, at least for me, worrisome.

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Have a great rest of the day!

Mike

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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