Will a weak pound prop up UK stocks? | Financial News


STOXX 600 down 0.7%

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Real estate stocks lead losses

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Swiss, Norwegian central banks hike rates

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BoE rate decision due later

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WILL A WEAK POUND PROP UP UK STOCKS? (0923 GMT)

What does today’s impending Bank of England rate hike mean for UK stocks?

According to Christoph Schon, senior principal, applied research at Qontigo, nothing too
positive.

“Conventional wisdom has it that higher interest rates make a currency more attractive to
foreign investors, whereas a weaker exchange rate can be good news for export-oriented
economies,” Schon said in a note

“Neither is true for the United Kingdom right now.”

Despite the Bank of England seemingly heading towards a similar base rate as the U.S.
Federal Reserve, the pound could weaken further versus the dollar, having already lost about
16.2% in value so far this year, its largest yearly drop since 2016, when the Brexit vote took
place..

The UK’s large trade deficit is likely to put downward pressure on the currency, Schon said,
while also fuelling inflation, meaning that a weaker currency may not be as good news for
British blue chips as it has been in the past.

“..tighter monetary conditions have so far been weighing on the pound. This contradicts the
customary notion that higher rates make a currency more attractive to foreign investors,” said
Schon.

An inverse relationship between a weakening pound and surging UK stocks was seen in the
months after the Brexit referendum, with the explanation being that large international
corporations derived a significant part of their revenues from abroad and the weaker exchange
rate made UK stocks a cheap option.

But recent data showed the UK’s trade deficit still at near all-time highs.

“As most of the imported goods are paid for in foreign currencies — most notably USD — this
is likely to add even more downward pressure on the pound, which will, in turn, make foreign
goods and services even more expensive for British firms and households and thereby further fuel
inflation,” Schon added.

REAL ESTATE STOCKS LEAD LOSSES IN EUROPE (0802 GMT)

Traders’ screens are flashing red as a busy central bank day kicks off in Europe, with the
STOXX 600 down 0.7%.

The Swiss National Bank delivered the first rate hike of the day, raising its policy
interest rate by 0.75 percentage points and providing a boost to Swiss stocks.

The Swiss index of shares spiked after the decision, and is outperforming other
major European indices, up 0.2%

Most sectors are down this morning apart from food and beverages, up 0.5% with a
2.2% gain in Swiss giant Nestle shares to thank.

Bank stocks also pulled higher, up 0.05%.

Real estate stocks have a hit another more-than-decade low for the second time this
week, last down 2.1%.

LET THE SHOW BEGIN: (0634 GMT)

European futures contracts are signalling a painful open, no surprise given the battering
U.S. markets took late in yesterday’s session after the Fed delivered another bumper rate hike
.

And the circus isn’t over yet.

Today is expected to bring chunky interest rate hikes from the Swiss, Norwegian and UK
central banks.

Futures on the Euro STOXX 50 are down 1.6%, while contracts on the FTSE 100
are losing 0.9%.
On the company front, Spanish bank Sabadell has received indicative bids from
France’s Worldline, Italy’s Nexi and U.S. firm Fiserv for its
payments arm, with a deal valued at up to 400 million euros ($393.64 million), three sources
said.

Italy’s market watchdog Consob has approved the buyout of luxury shoemaker Tod’s
proposed by the group’s founding family, the bidders said on Wednesday.

MARKETS ‘FED UP’: (0613 GMT)

No pain, no gain.

That seems to be message from the Fed as it gave sobering projections and set the ground for
its policy rate to rise at a faster pace and to a higher level than expected.

That sent Asian stocks crumbling to two-year lows, the dollar to a fresh two-decade
high and Treasury yields higher.

BlackRock, the world’s biggest asset manager, expects the Fed to raise rates few more times,
with data determining the “veracity” of that and how much longer they will have to go.

Rick Rieder, who heads BlackRock’s global allocation investment team says that due to slower
economic growth, the question now is when the economy will become “Fed Up,” with rising rates
and tighter liquidity and begin adjusting demand relative to these much tighter monetary
conditions.

Meanwhile, as sterling hit a new 37-year low of $1.1225, the only hope for any
remaining sterling bulls might be a massive hike by the Bank of England.

While economists polled by Reuters last week expect the central bank to announce at 1200 GMT
that rates will rise to 2.25% from 1.75%, financial markets have priced in a bigger move to
2.5%.

True, inflation is just off a 40-year high but Britain still has to cope with free-spending
government, slower growth and a tight labour market.

Elsewhere, Norway’s central bank is also widely expected to increase rates today by 50 basis
points to 2.25%, the highest level since 2011.

But the Swiss National Bank is expected to join the 75 basis point rate hike club to choke
off nearly three-decade-high inflation.

In Asia, the focus was on the Bank of Japan as it stuck to its ultra-loose monetary policy
and dovish policy guidance, remaining an outlier among a wave of central banks raising interest
rates to combat soaring inflation.

Key developments that could influence markets on Thursday:

Central bank meetings: Swiss National Bank, Norway central bank, Bank of England

Economic data: US weekly jobless claims





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