BoE Decision Day
The build up to tonight’s BoE rate decision (12pm GMT) has been nothing short of immense, with market pricing (11.5bps priced in) showing expectations are divisive as ever.
Why, why not? There’s good argument for the BoE to hold after markets registered the eighth largest jump in services PMI since early 2003, optimistic CBI manufacturing and less than disappointing UK employment figures. However, Brexit transition uncertainty, extremely weak December retail sales and dovish-inclinations from multiple MPC members could still marginally tilt the BoE towards a January cut of 25bps.
MPC? Traders are implying a 46% probability of a rate cut, but we believe the true chances are slightly greater than this, and that the MPC will walk out tonight having voted either 5-4 or 6-3 in favour of a cut. Haskell and Saunders should go again as dissenters having voted for a cut in December. Dovish-inclinations from Tenreyro, Vlieghe, Broadbent and Carney will also likely see them turn. In my mind, Haldane is the only one clearly in the hawk camp and therefore should be ruled out.
Reaction? Sterling has been awfully quiet over the past five trading sessions effectively sticking to the 55d-MA, and for good reason. Most traders are happy to be neutral, sitting on the sidelines ahead of what’s likely to be a strong tick up in GBPUSD volatility. Overnight Pound implied volatility is at 13.8%, implying markets are likely to see a range of +/- 87bps within 24hours.
If the BoE tone delivers this as more of an insurance cut, traders might feel that buying into GBPUSD dips represents good value given how structurally underweight the UK has been allocation wise for the best part of four years.
UK results not to be missed
Diageo: Look for the alcohol and spirits giant to be put under the microscope for its premiumisation tilt and sizable exposure to a nCoV troubled Asia Pacific, where 21% of its 2019 revenues was generated. Having fallen 5.2% since the virus outbreak, to keep risk sentiment it’ll need to deliver strong results from its productivity program, and greater synergies from acquisitions.
Unilever: Q4 price action has seen the stock edge down over 16% since making all-time highs in September, owing to lower growth forecasts and challenges in certain markets. With over 45% of its revenues generated in the heart of Asia, Africa and Eastern Europe, investors will be closely monitoring any negative changes in Unilever’s outlook driven by virus disruptions.
Global sentiment subdued
Day 10 of more loose Coronavirus headlines weighs on risk appetite. This time, it’s 7,783 infection cases and 170 deaths which delivers uncertainty to the market. It’s becoming harder and harder to compare 2003 SARs and 2019-nCoV, with the latter displaying a longer incubation period, higher transmission rate, but lower mortality rate. This has seen equities broadly sold on the whole, Gold surge back to US$1,580, US Treasuries bid down to three-month lows, and USD inflows strongest out of Asia EM space.
Asia hurting
How big the demand and supply shock will be given the spread of Coronavirus across the region remains to be seen. It really depends on when you think nCoV will peak. Some say the precipice of novel cases is likely to be at the end of next week, others suggest we’ll be waiting till March.
Either way, expect near-term sentiment to be exacerbated by uncertainty around consumption, production and supply chain disruption. Some economists have already slashed Q1 GDP to <5% – an enormous gap from where Q4 2019 printed.
USDTHB (+0.9%) has broken through 31 with ease, and eyes further gains as a decline in tourism, potentially to the tune of -60% to -80%, looks to hit Thailand hardest. Safe-haven USDJPY (-0.11%) reclaims the 108 handle. USDTWD (+0.7%), USDKRW (+0.5%), USDPHP (+0.2%) and USDCNH (+0.24%) are edging lower.
For regional benchmarks, it’s looking just as bad if not worse with Taiex (-6%), Hang Seng (-1.6%), Kospi (-1.6%) and Nikkei (-1.9%) finding easy sellers at time of writing.
