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Video / 02 August 2017 at 7:47 GMT

From the Floor: Tension mounts over BoE rate guidance — #SaxoStrats

#SaxoStrats
  • • Tension rising over potential Bank of England rate hike guidance on Thursday
  • • Apple Q3 earnings roughly in line with estimates; company lifts revenue guidance
  • • Apple shares jump 7% in afterhours trading on revenue guidance upgrade
  • • USD broadly weak, despite a 'bit of a bump against the yen'
  • • Commodities, including oil, weaken
  • • German 10-year yield drops below 0.50%, US treasuries in tight range
  • • Venezuelan bonds dive deeply on political turmoil

SaxoStrats banner
By John Acher

Tension is mounting in the financial markets over the chances that the Bank of England could flag an interest-rate hike on Thursday, and the reaction could be severe in either direction as the markets remain divided over the likely outcome, says Saxo Bank's FX strategy chief John J Hardy.

"[There’s] a lot of tension over whether they are poised to hike rates after some pretty split votes recently," says Hardy. 

That creates a two-way set-up for volatility, where dovishness from the BoE would disappoint many market participants, while clear guidance for a hike has the potential to spark a knock-on rally, Hardy says. 

Meanwhile, the US dollar remains "very weak broadly" despite "a bit of a bump against the yen," he says.

Shares in US technology darling Apple leapt more than 7% in afterhours trading on Tuesday and the company sparked a wider tech rally by delivering solid third-quarter results and lifting its guidance for fourth-quarter revenue.

Apple chief executive Tim Cook also generated enthusiasm by discussing Apple's intentions to dive further into the autonomous systems business, says Saxo Bank's equities strategy chief Peter Garnry.

"The technology sector was really gaining on the back of Apple earnings,” he says.

But the main driver was Apple's upgraded outlook for fourth-quarter revenue to a range of $49-52 billion against the market's expectation of $49.1 billion: "That is really what is bolstering technology sentiment here."

Commodities remained soft, with oil prices dented again by the American Petroleum Institute's weekly data on Tuesday showing a further build-up in US oil inventories.

In the fixed-income markets, core European yields fell, with the 10-year bund yield ducking below 0.5% to its lowest level since early July in slow summer trading. 

 German 10-year yield falls below 50 basis points
German 10-year yield
 
US Treasury yields remained in a tight range — 2.25-2.35% for the 10-year — on unpredictable US politics and persistent worries about a conflict with North Korea.

Venezuelan bonds have plunged after president Nicolas Maduro at the weekend carried out a controversial and disputed vote to further consolidate power, throwing the South American oil-exporting country into turmoil and raising the prospect of a sovereign default, says Saxo Bank's fixed-income trader Michael Boye.

Venezuela's 2017 bond, which matures in just a few months, is trading at 70 cents on the dollar, Boye says.

"If they pay this one back at 100, you are looking at more than 50% absolute return, so that tells you want kind of distrust the market has right now towards Venezuela," Boye says.

Bank of England
 The Bank of England's policymakers meet on Thursday.


John Acher is a consulting editor at TradingFloor.

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