GBP resumes sell-off as BoE intervention optimism fades – Daily Market Brief, Thursday, September 29, 2022

GBP/USD trades 1% lower, giving back yesterday’s gains after the BoE intervened to calm a jittery bond market. The BoE’s measures don’t address the root cause of the problem – the Chancellor’s tax cuts and spending.

·         The DAX holds over 12000 ahead of German inflation data, which is set to rise to 9.4% YoY

·         US futures pare yesterday’s gains ahead of US GDP data

·         Porsche AG is due to float today and is expected to be valued at €75 billion

Enough was enough yesterday for the BoE. The UK central Bank stepped into the bond market to bring some stability after the turmoil which has been brought about following the Chancellor’s mini-budget last Friday. The BoE pledged to buy unlimited long-dated bonds over the next two weeks to calm the markets and prevent a crash in the gilts market.

The move appeared to provide some much-needed relief to the jittery market, and 30-year gilts jumped by the most on record. The move by the BoE calmed bond markets across the globe, halting a deep selloff and pulling yields lower. The 10-year US treasury yield tumbled 5.3%, pulling the USD with it and lifting stocks.

However, the BoE-inspired relief in the markets is already starting to fade as the USD resumes its rally. The pound is paring its gains from yesterday, falling over 1% in early trade. While the move by the BoE brought some short-term reassurance, it doesn’t get to the root of the matter, and the nagging doubts over Britain’s economic management and the Chancellor’s plan remain very much in focus. The BoE’s move helped lower borrowing costs for the government, but the problem of fiscal loosening while monetary tightening hasn’t been resolved. The pound is likely to remain under pressure for now.

The FTSE is set to open modestly higher after booking gains of 0.3% yesterday.

German inflation

Meanwhile, the DAX is set to open -0.3% lower, giving back yesterday’s gains ahead of German inflation data, which shows no signs of slowing. Expectations are for German inflation to rise to 9.4% YoY in September, up from 7.9% in August. Hot inflation will pile pressure on the ECB to hike rates aggressively at the October meeting after a 75 basis point moves in the last meeting. While the DAX has recovered from yesterday’s low of 11860, a level last seen two years ago, the price remains depressed at around 12100.

US GDP

Looking ahead, GDP data from the US and Canada will be in focus. The US Q2 GDP is the final reading and tends to be less market moving. Expectations are for a confirmation of the earlier reading of -0.6% QoQ annualised. Any further weakness in the GDP print could fuel recession fears, bringing stocks lower.

The S&P 500 futures trades -0.6% lower after booking gains of 1.97% yesterday.

Porsche IPO

Porsche is set to float today. Shares have been selling for 82.50, putting the company valuation of  €75 billion, in Europe’s largest IPO in a decade. Trading is due to start in Frankfurt after parent company Volkswagon’s supervisory board approved the final price. Demand has been strong despite the challenging macroeconomic backdrop. The European energy crisis, rising interest rates, and record inflation have meant that companies have shied away from going public. Should Porsche pull off this successful IPO in such challenging market conditions, it would highlight just how attractive the business is. 

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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