Sunset Market Commentary

Markets

• The UK central bank kept the policy rate unchanged at 3.75% in a 6-3 vote. While not a surprise, the Bank of England is in fact preparing markets for a first hike, perhaps as soon as the next meeting in November (which features new forecasts). At the heart of the BoE’s discussions lie second-round-effects. For a majority, absence of it means the central bank can wait a little longer before tightening in a sluggish yet more-resilient-than-expected economy. Even as CPI is projected to top 4% by early 2027. The three dissenting policymakers, however, see value in a precautionary rate hike to prevent the BoE from falling behind the curve and, as a consequence, needing to do more later on. The policy communiqué is nudging towards their direction though, stating that “the risk of such effects, against which policy needs to lean, is greater the longer higher energy prices persist or are more volatile.” The meeting minutes also showed that policymakers considered it not appropriate to wait too long for actual evidence of these second-round-effects before responding with policy, given the lags with which they appear. With the Middle East conflict having become more protracted than the BoE had expected previously, its Committee judged that the risks to the inflation outlook are tilted to the upside and more so than at the time of the July meeting. Short-term gilt yields drop 4.5 to 5.5 bps after the decision, probably reflecting the fact that no policymaker switched camps in favour of the hawks, just yet. Governor Bailey and Lombardelli in their written rationale appear close to do so. Money markets attach an 80% probability of a November hike, the first of at least three moves in total. The long end of the curve outperforms strongly with the likes of the 30-yr tanking 10 bps. That’s because of the BoE’s QT programme changes. Of the £488bn gilts outstanding, it will keep £120bn permanently in stock. Of the remaining £368bn, £222bn rolls off naturally by 2035. The rest carries maturities no longer than 2049 and will be sold at a £20bn annual clip. Sales may directly be offered to the government (through the Debt Management Office) instead of the market and in any case are paused until April 2027 to hash out the final details. On average, the portfolio will be wound down by £46bn a year, slightly below the £50bn expected and slower than the £70bn previously. The decision is clearly aimed at easing selling pressure at the long end of the curve. Sterling declines marginally, but losses could have been more substantial. EUR/GBP rises to 0.859.
• US Treasuries rise as well, in a sign of Fed credibility being restored after yesterday’s meeting. Warsh passed the litmus test, strengthening the psychological and technical 5% barrier (10-yr) especially if energy prices consolidate. US yields slip 6-8.5 bps across the curve, returning all and more of yesterday’s post-Fed gains. European rates forfeited earlier gains to trade up to 4 bps lower at the long end. The US dollar drops a bit with a positive risk sentiment weighing the greenback down. EUR/USD holds south of 1.15 and DXY keeps the 100 barrier. European and US stock markets rise around 1% or more.

News & Views

• On August 28, the Turkish financial market regulator (SPK) announced measures concerning the fund industry. They included tighter limits for investment funds, stricter related-pay transaction rules, SPK approval requirements for share transfers and operational requirements for dormant or newly approved funds. Changes were tougher than expected aimed at reducing systemic borrowing risk. In the aftermath, asset managers failed to meet redemption requests which sparked wider liquidity concerns on Turkish financial markets. Turkey’s key equity index (Borsa 100) lost almost 10% by yesterday’s close compared to last Friday’s ending. Today, the SPK and the central bank (CBRT) stepped in to stop the fire from spreading further. SPK ordered the suspension of trading on the nation’s mutual fund platform for funds managed by 7 firms and decided that 130 funds from them would be liquidated. SPK temporarily reduced the minimum margin-maintenance requirement for leveraged stock positions from 35% to 20% until October 2nd. The CBRT reviewed its liquidity facilities and increased funding through its one-week repo auctions, expanded interbank borrowing limits and reduced collateral haircuts. The measures helped the stock market recover 4%.