Good morning.
Sterling supported by hints of fiscal stimulus from George Osborne
George Osborne’s declaration that the UK is still ‘open for business’ seems at odds with his pre-referendum warnings that the post-Brexit era would herald higher taxes and lower spending. Since the result, Osborne has dropped his commitment to a balanced budget and made headlines across the financial press after outlining his plans for a drop in corporation tax to below 15%, hinting that the Chancellor is more generous that he had previously made out. A corporate tax rate below 15% would make the UK one of the world’s most competitive, second only to Ireland’s ultra-low 12.5%.
Carney expected to reveal macroprudential measures tomorrow
Tomorrow’s Financial Stability Report from the Bank of England will outline the details of the bank’s pre-Brexit preparations and will likely include macroprudential measures such as liquidity support and bank capital requirements. On the latter, there has been speculation that the BoE could drop the required level of capital that banks are legally required to have on hand. If banks are required to hold a lower level of capital, their funds can be put to good use and lent to the real economy in order to keep credit markets afloat and levels of business lending healthy. The success of this measure will be dependent on the risk appetite of Britain’s high street banks and their confidence in UK business. As such, the Bank of England will be forced to strike a reassuring tone.
Global assets buy into the belief that even easier monetary policy is still to come
Once again, Asian equity markets have started on the front foot, with the Japanese yen slightly weaker and inflation hedges such as gold and silver rallying further. These assets are closely following the current market narrative: that global monetary policy will remain easier for longer. Forthcoming stimulus from the Bank of England in the coming months and expected support from the Bank of Japan have pushed markets further into the belief that the global economy has a long way to go before reaching crisis escape velocity.
Aussie dollar softer after indecisive election voting
General election voting in Australia has left the parliament in a state of limbo as neither the incumbent Liberal-National Coalition or the opposition Labor party have secured sufficient votes to claim a majority. The most likely path from here is for the current PM Turnbull to attempt to garner the support of independents in order to construct a fragmented and disjointed coalition, pushing his influence in parliament over 50%. Either way, the outlook remains murky enough for markets to push the Aussie dollar lower on fears the country could lose its AAA credit rating – one of the last remaining AAA sovereigns in the world.
Have a great day.