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Carney says no to QE: pound up, FTSE lurches

Smiths Group biggest faller on volatile FTSE, as investors await comments from US Federal Reserve chief Ben Bernanke.

 
Carney says no to QE: pound up, FTSE lurches

(UPDATE) A unanimous decision from Bank of England policy makers under new governor Mark Carney not to pump more money into the UK economy lifted the pound and robbed the FTSE 100 of earlier gains.

The support for more bond purchases which former governor Mervyn King had enjoyed from two of his colleagues on the monetary policy committee (MPC) evaporated as Carney’s brigade – voting in the Canadian's first week as governor – were united against adding to the £375 billion quantitative easing scheme.

The result was about-turns for both the pound and a volatile FTSE 100 as commentators said ‘R.I.P’ to the stimulus programme. Having started the day lower, sterling rose 0.3% to $1.5203 against the US dollar and 0.3% against the euro to €1.1555.

'I believe we have seen the last of any QE increases, as the MPC mood seems to be reflecting that of the US Federal Reserve that the effectiveness of QE may not outweigh the risks,' said Nick Beecroft, chairman of Saxo Capital Markets after the shift in sentiment was revealed in the minutes from the MPC's July meeting.

However the minutes showed that the Bank’s policymakers were considering other ways to stimulate the economy, even among signs of economic improvement, meaning the pound may revert to the downward trend it has followed since Carney started work at Threadneedle Street a fortnight ago.

‘While sterling has garnered support from the fact that QE may be off the agenda for now, it is likely that the BoE will be aggressive in the use of forward guidance as a method to prevent market rates ticking higher,’ explained Rabobank’s Jane Foley. ‘This should put sterling back on the defensive in the coming weeks’.

Sterling also benefited from a report showing a larger than forecast decline in the number of people claiming unemployment benefit, while the unemployment rate stayed unchanged at 7.8%.

The FTSE 100 fell 0.5%, erasing earlier gains, before recovering mid-morning to trade flat at 6,563.

Benchmark indices across Europe were similarly volatile as investors prepare for an update from US Federal Reserve chief Ben Bernanke this afternoon. Bernanke’s testimony to congress will be closely scrutinised for clues as to the fate of the Fed’s huge stimulus scheme.

Of UK stocks, engineering group Smiths (SMIN.L) led blue chips lower after the company told investors that its full-year profits would fall short of expectations by as much as £15 million. The profit warning for its Detection division sent the shares 3% down to £13.46.

‘Although this update is negative, it does not fundamentally change our view that this is a group containing high-quality operations, most of which are performing well against mixed market conditions,’ said Investec analyst Michael Blogg, keeping his ‘buy’ rating on the shares.

Miners made gains, led by Fresnillo (FRES.L), up 2.7% to £10.44 after the company met quarterly production forecasts, but cut its gold output guidance.

BHP Billiton (BLT.L) rose 1.3% to £18.54 after the company reported a strong quarter from its iron ore, copper and coal divisions. Nomura analysts summarised the trading update as ‘a solid production report with no concerns for investors but fairly limited impact,’ keeping their ‘buy’ recommendation.

See our FTSE data pages for more of today's risers and fallers

3 comments so far. Why not have your say?

Jonathan

Jul 17, 2013 at 13:52

If he hadn't voted no to more QE he would have been out voted by the rest of the MPC which wouldn't have looked a good start to his new job.

QE does fund the deficit so I am interested to see what new policy they can think of next that will fund the deficit and isn't buying government bonds. My guess is that they will continue to buy government bonds.

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Dawn Bird

Jul 17, 2013 at 16:49

My guess is that it will be MBS as well as gilts

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Jonathan

Jul 18, 2013 at 11:55

It's odd how the FTSE is also up normally it drops when the pound goes up. Must be the good news about the economy.

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