Increased risks of a no-deal Brexit after the assumption of Boris Johnson to the premiership of the UK have seen the markets price the odds of a rate cut by December by more than 50% according to Bloomberg data, a far cry from what prevailed at the beginning of the year when markets expected a rate increase by the Bank of England. While a cut will come with increased prospects of inflation, investors are betting that the central bank will not be deterred from cutting rates however. The pound closed about flat at $1.2152 while yield on 10Y UKTs closed 3bps lower at 0.6093%.
The latest set of euro area data is sure to make certain ECB stimulus, if there had been any simmering doubts left in the market. Economic growth in the bloc slowed to 0.2% in Q2 and left YoY growth at 1.1%, the weakest in five years; inflation also slowed to 1.1%, the lowest since early 2018. The reports are in line with the trend observed in the bloc’s largest economies, with growth having slowed in France, Spain as well as stagnated in Italy. The euro slid to $1.1076 against the dollar while yield on 10Y DBRs closed 4bps lower to -0.442%, a record low.
Asia markets opened down following the reaction of their Wall Street peers to the Federal Reserve’s comments following the rate cut. Stocks had slipped further in afternoon trading with the HANG SENG and ASX trading 0.78% and 0.26% lower respectively while the NIKKEI was up 0.09%, the only stock in the green during the session. The CSI was not faring any better following no major breakthrough during the just-ended round of trade talks with the next meeting set for September; it was trading 0.78% lower in the afternoon.
Turkey’s central bank cut its inflation forecast for the year to 13.9% from the previous 14.6% forecast but left next year’s estimate unchanged at 8.2%. Governor Murat Uysal also went on to state that there is “significant room for manoeuvre in monetary policy” pointing to further cuts in the future. He however also pointed out that they have adopted a cautious stance in that regard and made a point to emphasise that the decision was made independently. The lira closed weaker at 5.5827 to the dollar while TURKEY 47s were lower, in the high 84s.
Brazil’s central bank cut its benchmark rate, the Selic, by 50bps to a record low of 6%; this had only been forecast by 18 of 45 economists surveyed by Bloomberg. In a statement accompanying the decision, the bank said that the “benign scenario for prospective inflation” had prompted the adjustment for stimulus with mid-July inflation at 3.25%, a full percentage point below the year’s target. Policymakers did not expressly commit themselves to more rate cuts, instead warning that frustrations over expectations over economic reforms could drive inflation higher. The real closed weaker at 3.8148 to the dollar while BRAZIL 47s rallied to trade in the high 111s.
Wednesday’s OFZ auction drew lower demand than previous auctions but still sufficiently high with a bid-to-cover ratio of 1.52 for the 19.8 billion rubles that were sold. OFZ auctions are set to continue unabated as the Finance Ministry announced last week that 212 billion rubles will be issued In OFZ bonds as part of the process of transferring the beleaguered Sviaz Bank to Promsyvazbank. The ruble closed slightly weaker at 63.6429 to the dollar while RUSSIA 47s was slightly lower, trading in the low 112s.
Reports coming out of Zambia from the cabinet of the finance minister is set to re-assure international investors. Dr Ng’andu in a press briefing confirmed that external and domestic debts will be paid as and when due in accordance with current arrangements, and government arrears would be covered in annual budget provision. The minister informed that options for the redemption of the 3 outstanding Eurobonds are currently awaiting approval and re-assured that payment of debt is prioritized by the government and that debt service takes precedence on the consolidated fund of the budget. The South African Rand is currently trading at 14.39 against the USD on the back of the recent downgrade of the sovereign, while in the bond market the yield on ZAMBIN 8½ 04/14/24 was 17.52% at close of markets yesterday.