In an attempt to curb recession, Bank of England has increased interest rates by 50 basis points, or 0.50%. So far, the UK's central bank has been very tame in comparison to its counterparts. The US Federal Reserve had increased the interest rate by 75 basis points during their last meeting, while the Bank of Canada went ahead with a whopping 100 basis point hike. Looks like the UK had no choice but to step it up a notch, especially considering that inflation had risen to 9.4% in June. This decision takes the interest rates to the highest level since the 2008 financial crisis.
GBP was trading higher than the USD ahead of the announcement, but fell significantly shortly afterwards. The rate hike is generally considered to be good for the Pound as it strengthens the economy, so hawkish approaches are typically favored by traders. However, in this instance, the currency dropped because the overall assessment of the Bank of England was all doom and gloom.
According to Matthew Ryan, Head of Market Strategy at Ebury, “the bank’s appraisal on the impact of the cost of living crisis on economic activity” is of particular concern. “Policymakers now expect the UK economy to contract throughout all of 2023, with a peak-to-trough fall of more than 2 per cent. This is a far sharper downturn than market participants had accounted for, hence the initial knee-jerk sell-off in the pound.”
But not all hope is lost yet. Investors were focusing on the votes closely as this can give them a clearer picture of what to expect in the next meeting. During the previous meeting, the MPC (Monetary Policy Committee) voted 6-3 to raise rates by 25 basis points, suggesting that today’s decision wasn’t going to be unanimous either. Indeed, today’s decision was not unanimous but it was a very close call with a 8-1 in favor of a 50 basis point hike. This might be a hint that another rate hike of 50bp might be coming in September which might push the Pound back upwards. But even if the Pound appreciated again, it's hard to imagine that it would make much of a difference to the average citizen. While the MPC initially projected that inflation would peak at 11% towards the end of year, they have now adjusted it for 13.3% because of the soaring prices of gas.
As the energy crisis in Europe continues, Commerzbank issued a report saying that Germany is heading for a deep recession if Russia cuts off all natural gas supply. This comes after Russia cut the gas supply down in half from 40% to 20%. Businesses and consumers in Europe are trying to cut down on electricity usage as much as possible in an attempt to leave higher gas stocks for the winter and to decrease their energy bills as much as possible. Scarce gas supplies are driving the prices into unprecedented territories.
Oil, on the other hand, continues to slip following the decision of OPEC+ to only increase output by 100,000 barrels per day. While it's a nice gesture, effectively it means close to nothing as 100,000 barrels represents some 0.01% of the global demand.
Elsewhere, Chinese e-commerce mammoth Alibaba released its first quarter fiscal report today. The numbers beat market expectations and sent its stock skyrocketing in US pre-market trading. Alibaba shares climbed 4% in Hong Kong before the report was released, while in the US, the stock jumped as high as 7%.
Alibaba reports 205.55 billion Chinese Yuan in revenue, which equates to 30.68 billion US Dollars. This is significantly higher than the projected 203.19 billion Yuan. Earnings per depository share (ADS) came in at 11.73 Yuan, against the forecasted 10.39. Finally, the company’s net income was expected to come in at 18.72 billion Yuan, but was actually much higher at 22.73 billion.
The numbers came in better than expected, that’s undisputed. However, this is the first time in its history that the company posted flat growth. Of course, this can easily be attributed to resurgence of Covid cases in Asia and the general economic slowdown in China. Investors are certainly rejoicing at the numbers now, but they will be paying closer attention to the Q2 reports to see the growth numbers change.
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