News Column

MARKET COMMENT: Oil Stocks Lift UK Market As BoE Rattles Pound

June 18, 2014

Jon Darby



LONDON (Alliance News) - The major UK stock indices are trading higher Wednesday, while the pound jumped to an almost five-year high against the dollar before falling back on a mixed message from the latest Bank of England policy meeting minutes.


By mid-morning Wednesday, the FTSE 100 is up 0.4% at 6,790.35, the FTSE 250 is up 0.3% at 15,628.12, while the AIM All-Share is down 0.1% at 785.27.


Major European equity markets also are a little higher, with the French CAC 40 up 0.2%, and the German DAX 30 up 0.3%.


The major economic focus of the morning has been the release of the minutes from the BoE's Monetary Policy Committee meeting on June 4 and 5. All nine members of the MPC voted to keep the bank rate on hold at 0.5%, and to maintain the central bank's GBP375 billion stock of asset purchases.


However, the pound jumped against the dollar to a session high of USD1.7002, as the minutes noted surprise amongst the MPC members at market expectations of a late timing for the first UK interest rate rise, given the possibility that the improving economy may use up slack faster than expected.


"The relatively low probability attached to a Bank Rate increase this year implied by some financial market prices was somewhat surprising," the minutes read. Market prices have been suggesting a 15% chance of a rate rise before the end of the year.


The most recent hawkish message from the BoE minutes comes after Governor Mark Carney said last week that the decision to raise interest rates "is becoming more balanced".


"Consistent growth and a speedier than expected recovery all point to the UK becoming the first major economy to tighten monetary policy since the financial crisis," said UFXMarkets Managing Director Dennis de Jong.


It is the second time this week, and only the second time since August 2009, that the pound has risen above USD1.70, which analysts note as a key resistance level. However there was something for both hawks and doves in the BoE minutes, and the pound has since given up all of its gains and trades a little lower at USD1.6940.


The BoE minutes also noted that "the precise timing of the rise would depend on the outlook for inflation". Given that annual UK CPI, the BoE's target inflation measure, Tuesday slipped to a four-and-a-half year low of 1.5%, this suggests that rates may stay low for longer. There has also been a growing expectation that one or two members, most notable known hawk Martin Weale, may have voted for a hike this month, meaning the 9-0 vote came as a disappointment to some.


"Markets had been expecting some dissent given Carney’s comments last week, and then we get a copy and paste of last month’s minutes," said CMC Markets market analyst Michael Hewson. "For me it's all about the inflation and average earnings data. Until these two cross over, I think a hike remains unlikely."


Within the UK equity moves, Royal Dutch Shell is providing a significant boost the FTSE 100. The biggest company by market capitalisation in the leading index sees its A-shares up 1.5% and its B-shares up 1.7% after announcing that it has signed an agreement with the state-owned China National Offshore Oil Corporation Wednesday. The two companies said they have signed a new strategic alliance agreement, which largely reaffirms a previous alliance deal the companies had but also commits them to exploring cooperation opportunities in areas from oil exploration to refining.


Oil companies in general are receiving a boost from the possibility of civil war in Iraq, where fighters of the radical Islamic State in Iraq and the Levant have taken control of Iraq's largest oil refinery Wednesday, according to officials.


The price of Brent oil has risen again following the most-recent developments and given the possible disruption to supply. Brent now trades at USD113.53 per barrel, about 50 cents off its recent high last week, made when the conflict in Iraq began to deteriorate more rapidly.


BG Group is up 1.1%, Ophir Energy is up 0.9%, and Tullow Oil is up 0.3%.


After the morning focus on the UK central bank, markets will be waiting for the latest policy decision from the US central bank still to come, which will likely mean more volatility for the pound against the dollar. The Federal Reserve will announce any policy change after the European market close, at 1900 BST.


"Cable is in the eye of the storm today due to the publication of the minutes of the BoE’s June MPC meeting and the FOMC meeting later this evening," said Rabobank analyst Jane Foley.


A further USD10 billion taper to monthly Federal Reserve asset purchases is widely expected, while all eyes will be on Chair Janet Yellen for clues as to the timing of the first US interest rate rise, as the debate heats up as to whether it will be the UK or the US to be the first to pull the trigger.


Ahead of US MBA Mortgage application data, still to come at 1200 BST, futures trading indicates stocks on Wall Street will open fractionally lower.


Keeping the pound in focus, there is also a speech from BoE hawk Weale still to come at 1215 BST.







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Source: Alliance News


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