Steen Jakobsen
The Bank of Japan has abandoned quantitative easing and the European Central Bank may taper its bond-buying programme, so what is the role of central banks in 2017, asks Saxo Bank’s chief economist Steen Jakobsen.
Article / 01 July 2016 at 7:02 GMT

Morning Markets: Carney calm — politicians harm

Managing editor, / Saxo Bank




  • Eurozone June Manufacturing PMI               (0830 GMT)
  • US June ISM Manufacturing Survey             (1400 GMT)

Have we ever seen such a day in British politics? Boris Johnson declined to enter the race for the leadership of the Conservative party and de facto future prime minister after his Brexit ally Michael Gove pulled off the most delicious of Machiavellian manoeuvres to consign the people's champion to the sidelines. It was, quite extraordinarily, enough to relegate the shenanigans in the leadership crisis of the "official" opposition Labour Party to the inside pages.

GBPUSD took an immediate plunge in the aftermath of Johnson scarpering with parachute firmly fixed and eventually went on to fall to 1.3214 when Bank of England governor Mark Carney calmly stepped into the breach with soothing noises on quantitative easing if required and a cut in interest rates if necessary to shore up a "stressed" UK.

The bank has thus far spent £375 billion on QE, but has not used the tool since 2012. The signal also follows on from South Korea's central bank intervention earlier this week of $17bn and the strong belief that the Bank of Japan is considering such a move.

Carney's intervention 1) showed the politicians how to step up to the plate, 2) helped restore confidence domestically — the FTSE 100 was up 2.27% — and 3) calmed global markets as US and Asian markets responded positively to the prospect of yet more easy money flooding through the system for a sea of green through the key indices.

But the £32.6bn deficit coursing through the UK's trade balance means there are mounting concerns over sterling's ability to recoup much if any of its post-Brexit losses — GBPUSD was at the 1.50 area on the night the polls shut — if foreign money starts to exit its shores, a fear Carney highlighted yesterday. That has also seen an astonishing safe-haven flight to gilts that has sent the two-year gilt yield into negative territory and the 10-year yield below 1%.

GBPUSD was at the 1.3230 area in the runup to the European open.

Elsewhere, Tesla shares slipped after its autopilot system was blamed for a fatal accident on May 7 and, while it appeared to be holding yesterday evening at above 212, the stock darling could face a rough day. China meanwhile came in with a netural PMI that kept the notoriously fickle Shanghai Composite Index ticking over.

But, one week on from that tumultous decision to exit the European Union, it is still the Brexit that dominates. A crisis of leadership is manifest in the UK — who will fill the breach?

Market signals

Asian session

  • Australia's manufacturing sector has achieved 12 consecutive months of growth
  • The Australian Industry Group Index rose 0.8 points in June to 51.8
  • Australia's 10-year bond yield was back under 2%
  • BoE Governor said the bank would likely need to pump more stimulus into the economy 
  • Asian markets rose despite downbeat data from Japan and China
  • Japan's household spending fell 1.1% year on year in May
  • Japanese consumer prices, excluding food, fell 0.4% in the same month
  • The BoJ's quarterly Tankan survey showed sentiment stood unchanged at plus 6 in June
  • At 0515 GMT, the Nikkei was up 0.47% at 15,649
  • China's manufacturing PMI came in at 50 in June, down from the previous month
  • Caixin's China June manufacturing PMI was 48.6, compared with 49.2 in May
  • Miners helped ASX200 return to pre-Brexit levels; it was up 0.2% at 5246 at 0515 GMT 

From the Floor

Knife’s edge. “The rally in equities is running out of steam […] That happens with the global economy still balancing on a knife edge,” says Garnry.

Precious. “Silver is the one to look out for at the moment. […] The surge in silver is supporting gold as well,” says Hansen. 

Get all the latest from Saxo Bank's trading floors in From the Floor, within the hour.

In opinion

The June manufacturing PMIs for Europe and US could provide an important glimpse into whether the real economy is going to take a hit from Brexit, writes Juhani Huopainen.

Damage control
Unless Japan's exchange rate weakens significantly, another cut to the inflation outlook is likely, further damaging the Bank of Japan's credibility, explains Max McKegg.

Stunted growth
Data shows we are operating in a historically low-growth environment in terms of both macro and corporate earnings, says Peter Garnry.

Last orders
Policymakers who attempt to ignore last week's seismic Brexit result and pursue the same old policies may find it's the last time they do so, writes Steen Jakobsen.

Wind change
Since the effects of last week's Brexit decision – which shook both the UK and Europe – the geopolitical winds have begun to blow in a most unexpected direction, explains Nadia Kazakova.

Boris betrayed?
Boris Johnson has decided not to throw his hat into the ring for the leadership of the Conservative Party. Martin O'Rourke explains why and what's likely to happen next.


 The Bank of England will pump more stimulus into Britain's economy over
the summer to contain the economic fallout of Brexit. Photo: iStock

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