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The Carney effect: pound jolted and FTSE soars

(UPDATE) Bank of England statement on rates surprises markets, propelling FTSE 100 as much as 3% higher. ECB rate signals weigh on euro. 

 
The Carney effect: pound jolted and FTSE soars

(UPDATE) Less than a week into the job and new Bank of England governor is already having a huge effect on Britons’ assets: the pound shot lower on Thursday afternoon while the FTSE 100 added to earlier gains for a rise of 180 points after the Bank took the unusual step of saying market expectations of rate rises were ‘not warranted’.

Though the monetary policy committee left the base interest rate unchanged at 0.5% and refrained from adding to its £375 billion of QE bond purchases, as expected, the Bank issued a statement saying ‘the implied rise in the expected future path of the Bank Rate was not warranted by the recent developments in the domestic economy.’

The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%.  The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion.

Since the May Inflation Report, market interest rates have risen sharply internationally and asset prices have been volatile.  In the United Kingdom, there have been further signs that a recovery is in train, although it remains weak by historical standards and a degree of slack is expected to persist for some time.  Twelve-month CPI inflation rose to 2.7% in May and is set to rise further in the near term.  Further out, inflation should fall back towards the 2% target as external price pressures fade and a revival in productivity growth curbs domestic cost pressures.
 
At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report.  The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.
 
The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds.  This analysis would have an important bearing on the Committee’s policy discussions in August. 
In the light of these considerations, the Committee voted to maintain the size of its programme of asset purchases financed by the issuance of central bank reserves at £375 billion.  The Committee also voted to maintain Bank Rate at 0.5%.
 
The minutes of the meeting will be published at 9.30am on Wednesday 17 July.

The pound fell 1.3% to 1.5080 as investors prepared for either more stimulus or at least rock-bottom interest rates for longer. The FTSE 100 added to earlier gains, shooting as much as 3% higher to 6,427 – a level not seen for a month.

Economists debate exactly what the statement means for policy – maybe more QE asset purchases as soon as next month – but say the message is clear; that Carney is starting as the stimulus-friendly governor markets had hoped for.

'The statement sends a clear, decisive signal – Mr Carney has not spurned an opportunity to provide early guidance, which we expect to be supplemented in subsequent months,' commented Royal Bank of Scotland economist Ross Walker.

Click here for further analysis of the Bank of England's statement.

The euro slumped too, off 0.8% to $1.2902 as Mario Draghi held his press conference after the European Central Bank kept monetary policy on hold at its monthly meeting. The single currency headed lower on the ECB chief's comments that rates will remain low for 'an extended period of time'.

House builders rally as property recovery gains pace (08:43)

‘If ever we need proof that the housing market is recovering, we have it now,’ said one analyst as house building shares rallied on signs they are profiting from measures to re-inflate the property market.  

In buoyant European markets, Redrow (RDW.L), up nearly 6%, was the biggest gainer on the FTSE 250 in early trade. The house builder announced in a brief trading statement that its profits for the year to 30 June 2013 will be ‘above the top end of the range of analysts’ estimates’.

Taylor Wimpey (TW.L) wasn’t far behind, up 3% to 99p after announcing it expects to report a UK operating profit margin for the first half of 2013 of over 13%. Pete Redfern, chief executive at the group, pointed to ‘increased consumer confidence, underpinned by both generally improved access to and affordability of mortgage finance and by the recent Government measures’.

Galliford Try (GFRD.L) reported record full year results, helped by a strong performance in its housebuilding division. The market had anticipated the numbers and were slightly lower at 971p.

Persimmon (PSN.L) made similar comments to Taylor Wimpey on Tuesday in a similarly upbeat update to investors. This morning, the blue chip house builder enjoyed a 1.6% gain to £12.33.

Crest Nicholson (CRST.L), Barratt (BDEV.L) and Savills (SVS.L) estate agents all moved higher in sympathy.

‘If ever we need proof that the housing market is recovering, we have it now,’ commented Jefferies analyst Anthony Codling, who rates Taylor Wimpey a ‘buy’. ‘In our view, the Group is expressing confidence that the market is now more likely to move up than down,’ he added.

His comments came as Halifax reported a 0.6% rise in house prices in June. This is the latest report suggesting the UK housing market has turned a corner, after chancellor George Osborne announced plans in his March Budget to boost house building, including the ‘Help to Buy’ scheme.

'The overall success of the measures will depend on whether enough lenders get on board and offer competitive mortgage products. The
signs are all positive however,' wrote Panmure Gordon analyst Mark Hughes in a note this morning in which he kept his 'sell' rating on Taylor Wimpey for valuation reasons, but upped his target price to 79p from 72p.

Housing stocks have already rallied strongly and Peel Hunt analyst Charles Hall added: 'Understandably, investors will be a little wary of chasing stocks that have performed very well this year, but the fundamentals in terms of volumes, margins and cash flow will continue to help these stocks through FY2014 at least'.

The housing market gains also come amid signs of more general improvements in the UK economy, which are expected to prevent any change in monetary policy from the Bank of England’s monetary policy committee today when it votes for the first time under the leadership of Mark Carney, who only started as governor on Monday. The pound was trading down 0.14% at $1.5258 ahead of the meeting.

The European Central Bank is similarly expected to keep policy on hold amid some slightly improved economic data.

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

Markets rally as crises tamed

Equity markets were rallying ahead of the central bank meetings. The FTSE 100 and pan-European eurofirst 300 both rose 1% to 6,288 and 1,161 respectively, with banks and miners shining in London. Overnight Asian markets had moved mostly higher after Wall Street managed to shake off Europe’s Thursday weakness which saw the FTSE 100 drop as much as 100 points.

Portuguese shares rallied back, with the benchmark index climbing 3% after tensions over the stability of the government eased.

Oil dropped back after the army ousted president Mohammed Morsi and installed Adli Mansour as interim leader. Brent crude futures were trading 0.3% lower at $105.45 a barrel.

With US markets closed for Independence Day today, investors are eyeing Friday’s US jobs data for direction.

8 comments so far. Why not have your say?

Dawn Bird

Jul 04, 2013 at 10:31

Rising house prices underpinned and guaranteed by the British taxpayer. The economy rapidly turning zombie,banks which are close to being insolvent. Borrowers on their last legs, and rising interest rates. Hurray we have a winning combination

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David West

Jul 04, 2013 at 14:20

@Dawn Bird

I'm surprised with this attitude you bother to read Citywire. The financial arena must get you so depressed that it really does not seem worth putting yourself through such an ordeal.

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Paul Hastings

Jul 04, 2013 at 15:20

Well said David. I wholeheartedly agree.

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Graham Walker

Jul 04, 2013 at 16:47

I should appreciate informed comment on the following. The BoE only really sets the base rate so the Governor's comments really only applies to ultra short rates and then only to those that can borrow 'at the window' or those very fortunate people that have low spread tracker mortgages. Long term rates say 2-10 years are allegedly set by market opinion and forces, longer rates and therefore swap rates and, accordingly, available term mortgage rates have risen of late. I can only see such confidence, if it is that or no more than a short covering rally, is warranted in the stock market unless we see an actual increase in QE. In the meantime savers continue to be heavily penalised to facilitate both Government borrowing and bank balance sheets which are struggling to meet the new liquidity ratios.

Is the rise in stock markets, and the recent rise in property prices justified or is it the return to long term moving averages, or pent up demand outstripping supply in both cases.

I remain very confused by these paradoxes and therefore siting on the sidelines in cash going backwards at the ever increasing rate of inflation, has there been a worst time in modern economics to be a saver, investor or pensioner??!!

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David West

Jul 05, 2013 at 09:48

Graham

We are where we are at this point in time. I'm 62 and have been investing in equities and bonds since 1984. Whether my opinion is "informed" or not depends since everything is relative. Remember also that opinion is just that whether from a perceived expert or not. For every positive view there is a negative one. Probably just as well since the truth is usually somewhere inbetween.

Having said all of the above, (apologies for preaching), my own personal experience has taught me not to worry too much about where the market, interst rates or macro economics are at any one point in time. I have made mistakes but also some right calls over the years probably due to a combination of luck and some knowledge gained over time.

The tone of your last paragraph suggests that you are as confused as the majority of us as to what to do for the best. Join the club so to speak! Without knowing a little about you (i.e. your age, attitude to risk and your financial objectives) it is difficult to offer you advice or opinion. However, from a common sense point of view I personally have asked myself the question as to where to make my own investments. The answer I have given myself is that money on deposit is currently losing value. Well run companies with good cash flow, sound management etc. are likely to stay ahead in the game both by combating inflation and providing a true return in dividends and capital growth of ones initial investment. For this reason I have not sold any of my existing investments and am currently investing any excess cash in more equities. But that's me, it may not be right for you.

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Graham Walker

Jul 05, 2013 at 10:53

Hi David and thank you for your comment the last paragraph of which wa useful. I am 60 have taken most of my pension lump sums and have the 75% balances in cash in income drawdown not currently taking the income as we don't need it. We have a property port yielding about 7% an income after costs of approx 65k. Of our other investments and reserves all of it is sitting in cash funds, but 50% of that is tied ina life bond so restricted to the funds that are available by that provider (all Std Life) . My background is as an economist and career wise City as a SVP of an investment bank, these factors are restrictive kn their own right, paralysis by analysis! I HATE THE FUNDAMENTALS at this time. Your final comment/advice echoes that of somebody Imwas talking to last week that is a private wealth advisor for Deutsche Bank, he said they are taking the Warren Buffet long view, but at 60 I don't feel that is an option and I am not a dividend hound so really want the nirvana of say 5-6% capital growth with good capital preservation but I think those days are gone and reconciling myself to that after 35 years of good returns is proving difficult. thanks anyway for your observations.

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Graham Walker

Jul 05, 2013 at 10:55

Sorry David a p.s. we left the City 18 years ago and have made a life in the 'real' world since, less income but more honesty!

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John Griffiths

Jul 06, 2013 at 20:01

There are still investments around that pay much much higher than High St savings - you should seek them out, but don't bet the farm! A smallish percentage is enough!

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