Markets rallied strongly overnight after the Bank of England postponed for three weeks a cut in UK interest rates.
Investors had widely expected the UK central bank to cut rates at its meeting this week, but there was shock when the announcement last night, our time, revealed the bank had kept interest rates unchanged.
The move saw another record end to trading on Wall Street. The S&P 500 and the Dow finished at new record high closes this morning, our time, extending the winning streak for a fifth session.
The S&P 500 rose 11 points, or 0.5%, to end at 2,163, its fourth straight record close. The Dow added 134 points, or 0.7%, to 18,506, for its third record finish in a row.
And the Nasdaq rose 28 points, or 0.6%, to 5,034, ending at its highest level for 2016 and turning positive for the year.
Giant US bank, J.P. Morgan added to the upbeat tempo by revealing better than expected second quarter earnings.
The local market will start with a small 7 point (and not very convincing) gain after trading on the overnight futures market, while the Aussie dollar edged higher to trade around 76.35 US cents early Asian dealings this morning.
Oil edged up 1.6% to around $US45.40 a barrel, while gold fell $US10 an ounce to $US1,333.
Markets had convinced themselves over the past week that the Bank would announce the first UK rate cut in more than seven years with Britain’s economy reeling from the June 23 vote to leave the European Union.
Investors had been looking for a cut of 0.25% in the bank’s key indicator rate which stands at 0.50%.
The BoE said it was likely to deliver stimulus in three weeks’ time, possibly as a "package of measures," once it has assessed how the June 23 vote has impacted the economy.
"In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the Committee expect monetary policy to be loosened in August," the Bank said in minutes of its July meeting which ended on Wednesday.
"The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round," it said. After the initial shock, analysts noted the bank’s Monetary PolicyCommittee had unanimously reiterated Governor Mark Carney’s commitment “to taking whatever action is needed to support growth and to return inflation to the target over an appropriate horizon”.
The BoE’s decision did not reflect any official change of view over the damaging short-term economic consequences of leaving the EU but surprised financial markets where expectations had risen that the bank would take action immediately.
The pound jumped, gaining 2.7% on the session to reach a peak of $US1.3470. It has since eased back but is now 1.2% higher on the day.
The Bank of England statement added that markets have “functioned well” through the latest blast of volatility stemming from the UK’s vote to leave the EU, but also that “economic activity is likely to weaken in the near term”.
"Official data on economic activity covering the period since the referendum are not yet available. However, there are preliminary signs that the result has affected sentiment among households and companies, with sharp falls in some measures of business and consumer confidence.
"Early indications from surveys and from contacts of the Bank’s Agents suggest that some businesses are beginning to delay investment projects and postpone recruitment decisions. Regarding the housing market, survey data point to a significant weakening in expected activity.”
The Bank of England’s non-decision (and hint of an easing in August) saw government bond yields in the US and elsewhere rise as investors bet that central banks (especially the Bank of Japan) will reveal new stimulus packages soon.
Yields on the 10-year US Treasury, rose 6 basis points to 1.54%, while the yield on the 10-year UK government bond rose 4.8 basis points to 0.79%. The 10-year German bund yield rose 4.5 basis points to -0.04%.
Bond yields have risen sharply from the record lows seen in the wake of the Brexit vote last month.
