What has happened
Markets were rangebound yesterday as new case growth continued to make headlines, but investors remained distracted by the abundant liquidity on offer.
Bank of England disappoints
The Bank of England disappointed markets yesterday with a £100bn Quantitative Easing announcement which was at the bottom end of expectations. As with the Federal Reserve last week it wasn’t the particular actions of the Bank of England that concerned investors but more the rationale for the actions. Negative rates were not discussed at the meeting and whilst the jury is still out on the efficacy of negative rates markets have taken this as a sign of complacency now the market has rallied. The comment that now liquidity had stabilised, asset purchases could continue at a slower pace, contributed further to this suspicion that the central bank feels it has done enough for the time being.
EU Recovery Fund…
Today attention will turn to the European Council meeting where the EU recovery fund remains high on the agenda alongside a broader discussion on the bloc’s long-term budget for the next 7 years. These budget discussions are clouded by Brexit with other nations needing to step up to fill the gaps in spending requirements. Expect discussions on the fund to tee up a potential summit in July but as we read it there has been little actual movement on the Frugal Four’s view that a recovery fund is fine, but it must be loans rather than grants. The risks are probably skewed to the downside here as any suggestion that either side are sticking to their red lines or that the nascent economic recovery now justifies a smaller package could damage sentiment.
What does Brooks Macdonald think
After the resurgence of volatility in the last week we should be grateful for a few days where the market has largely trodden water. Reflecting this quieter atmosphere, the traded volumes in equity markets were well below recent averages. The Bank of England meeting yesterday delivered less than the market was expecting but didn’t undershoot sufficiently to scare investors. Central banks globally want to keep some of their powder dry, but this is a tricky message to deliver to investors baying for even more liquidity.