Wed, Dec 07, 2022 @ 13:37 GMT
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BoE’s Intervention Drives Broad-Based Risk-on

Market movers today

Aside from the ongoing focus on the developments in the UK and the tensions against Russia, markets will look out for the German flash inflation figures for September ahead of the Euro Area HICP tomorrow. Consensus is looking for a further uptick amid the surge in energy prices. In addition, the Euro Area Economic Sentiment Indicators are released for September, where a broad decline is expected in line with the other leading indicators released so far.

The Czech National Bank will have a monetary policy meeting, consensus expects no changes to the policy rate.

Minutes from Riksbank’s September meeting will be published, while Ingves, Flodén and Ohlsson will give speeches today. Several other central bank speeches are scheduled throughout the day, including ECB’s Panetta, Rehn and de Guindos as well as Fed’s Mester and Daly.

The 60 second overview

BoE intervenes amid extreme bond market sell-off: EUR/GBP rose briefly yesterday to around the 0.90 mark. This comes after the BoE announced that it will buy long-end government bonds until 14 October to “restore orderly market conditions”, with the gilt purchase size being up to GBP 5bn per operation. The BoE will then begin active QT (outright selling of government bonds) by 31 October, which was originally set to begin 3 October. The target still stands at reducing gilt holdings by GBP 80bn during the coming year. This intervention is intended to restore a bit more calm to the UK bond market, as opposed to the strong selling that we have seen in recent days.

Global markets seemingly affected by BoE intervention: BoE’s intervention appeared to move global markets as the some 50bp decline in long-end Gilts also saw major spill-over to euro area as well as US yields, with US 10yr down some 30bp from highs. Equally, risk sentiment strongly improved and S&P500 ended the day at nearly +2%.

Equities: Yesterday we saw a tiny rally based on the UK QE and the reason for writing tiny is that the reversal of UK bond yields was extreme compared to the rally in equities. Cyclicals did not even outperform despite the equity rally, as health care was among the best sectors while tech was among the worst performers. VIX ticked lower but Min Vol outperformed and quality made its seventh consecutive day of outperformance. This tells the equity story about how the UK QE move in no way was a positive macro story but purely an action to avoid the worst-case scenario in financial markets. In US, Dow +1.8%, S&P500 +2.0%, Nasdaq +2.1%, Russell 2000 +3.2%. Some relief in Asia this morning and lift to European futures while US futures are flat.

FI: Yesterday, the market was all focused on the UK drivers. Until the BoE announcement of its decision to conduct temporary bond purchases on a daily basis until 14 October of GBP 5bn/day and only start QT on 31 October, UK gilts were trading heavy. From the announcement however to the end of day, we saw the 10y Gilt down more than 50bp and the 30y Gilt down by more than 1pp. Bund ASW widened above the 100bp mark again yesterday.

FX: GBP made headlines again as it briefly rose above 0.90 following BoE’s decision to do temporary QE to stabilise the UK bond market. USD/JPY trades close to the 145 mark as 10Y US Treasury yields touched 4%.

Credit: Having taken out the peak in spreads reached during the pandemic yesterday, iTraxx Main eventually ended the day 4bp tighter at 135bp helped by the BoE’s intervention. Meanwhile, Crossover was 20bp tighter at 651bp. Unsurprisingly, given the volatility issuance activity was limited with no corporate EUR deals priced and in FIG space only one Euro covered bond was launched.

Danske Bank
Danske Bank
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