LONDON MARKET CLOSE: BoE Stimuli Push Up Stocks But Depress Sterling

LONDON (Alliance News) - Stocks in London ended firmly in the green Thursday, while the pound took a big hit, after the Bank of England announced a substantial package of stimuli including an interest rate cut to a new record low and an expansion in asset purchases, after recent macroeconomic data had pointed to a slowdown in the UK economy following the Brexit referendum.

The BoE also drastically downgraded its growth projections as the Leave vote heightened uncertainty and the sharp depreciation in sterling triggered an upward revision to the inflation forecast.

The Monetary Policy Committee voted unanimously to cut UK interest rates by 25 basis points to 0.25%, the first rate cut since 2009. Governor Mark Carney said in a press conference following the decision that there is room for further cuts to rates, but made it clear that they will not go as low as to become negative.

"I'm not a fan of negative rate interest rates," Carney said, speaking to journalists. The governor signalled that the lower bound of rates will be close to zero, but always "a positive number".

Alongside the cut to rates, the central bank expanded the size of its Asset Purchase Facility programme, with the increase totalling GBP170 billion as a whole. Purchases of UK government bonds will increase by GBP60 billion to GBP435 billion. This measure was passed after the MPC voted 6-3, with policymakers Kristin Forbes, Ian McCafferty, and Martin Weale against the proposition, preferring no change.

The MPC also decided on the purchase of up to GBP10 billion of UK corporate bonds, with the decision approved with 8-1 majority.

In addition, the MPC voted unanimously to introduce a Term Funding Scheme that will be financed by the issuance of central bank reserves, aimed to help reinforce the transmission of the interest rate cut to the real economy. The BoE said this will operate as part of the asset purchasing programme.

The value of the lending in the TFS will be determined by usage of the scheme, the bank said, and could reach "around GBP100 billion". Carney added that UK banks have "no excuse" not to pass on the rate cut.

The governor said that, at this meeting, "everyone in the MPC though this economy needed stimulus". Carney noted that the Leave vote in the referendum represents a "regime change", but said the UK is "one of the most flexible economies in the world".

Oanda senior market analyst Craig Erlam said that, with this decision, "the BoE became one of the only central banks to announce a stimulus package that appears to have, at least for now, exceeded market expectations and satisfy investors in a way that other central banks have failed this year."

According to the Inflation Report released alongside the monetary policy decision, the economy is likely to see little growth in the second half of 2016. Business investment is set to continue to fall in the near term on slower demand growth. Gross domestic product growth is forecast to ease to 0.1% in the third quarter of 2016. The bank slashed its GDP growth outlook for 2017 to 0.8% from 2.3%. Similarly, the projection for 2018 was trimmed to 1.8% from 2.3%.

The fall in sterling is set to push up inflation in the near-term. Inflation is forecast to return to the 2% target in late 2017 and overshoot this target throughout 2018.

Sterling dropped immediately after the BoE's decision, having being quoted at USD1.3316 just prior. At the London equities close, the pound stood at 1.3138, compared to USD1.3327 at the same time Wednesday. The currency, however, remained way above the 31-year low of USD1.2797 reached in early July, with the results of the EU referendum still fresh.

Contrary to the pound, London stocks shot higher after the BoE decision, with the FTSE 100 index ending up 1.6%, or 105.76 points, at 6,740.16. The FTSE 250 of mid-caps rose 1.5%, or 247.19 points, to 17,244.32, and the AIM All-Share added 0.6%, or 4.33 points, to end at 761.66.

Aviva ended as the biggest blue-chip gainer, up 6.7%. The insurer's chief executive told journalists he is unsure about what an interest rate cut in the UK will achieve, after the blue-chip insurer had posted higher operating profit and hiked its dividend on a strong first half for its life and fund management businesses.

Aviva CEO Mark Wilson, speaking before the BoE's decision, said there is not currently a large amount of household debt in the UK and borrowing rates are already "incredibly cheap". Wilson was sanguine when questioned about any impact Aviva could face from interest rates remaining low or, indeed, falling further.

He said Aviva has been structured to ensure liabilities and assets move together, adding the group has "deliberately positioned" itself as a "blue-chip haven" against low interest rates.

Aviva declared an interim dividend of 7.42p, up from 6.75p a year prior, driven by strong performances in its life insurance and fund management operations. It said it remains on track to deliver on its plan to increase its dividend payout ratio to 50% of operating earnings per share by the end of 2017 from 42% in 2015.

RSA Insurance also reported first-half results, delivering a big rise in underwriting profit and declaring an increase in dividend. Underwriting profit for the first half increased 63% to GBP119.0 million from GBP73.0 million. This was driven by a 3.1 percentage point improvement in RSA's attritional loss ratio to 54.8% from 57.9%. The group declared an interim dividend of 5.0 pence per share, up 43% from 3.5p a year prior. RSA shares rose 1.4%.

Shares in Standard Chartered added 4.3% after Standard & Poor's Global upgraded the lender to Hold from Sell, while HSBC Holdings rose 2.5% after Merrill Lynch lifted its recommendation on the bank to Buy from Underperform, according to traders.

Hikma Pharmaceuticals missed the gains, ending as by far the worst blue-chip performer, down 17%. The drug company late Wednesday said it expects full-year operating profit within its Generics division to be hit by changes in revenue mix, but maintained its guidance on its other two divisions.

The company noted that it had experienced some delays in certain product approvals, but said the impact to revenue should be offset by higher contract manufacturing revenue. However, Hikma said the change in revenue mix is expected to hit profitability in 2016, along with higher than expected costs resulting from the acceleration in timing of certain pipeline-related litigation.

Hikma said it now expects core operating profit within its Generics division to come in within the range of USD30.0 million and USD40.0 million for 2016, below the USD46.0 million reported for 2015. Hikma was downgraded to Neutral from Buy by Citigroup and to Hold from Add by Numis.

In mainland Europe, the CAC 40 index in Paris the DAX 30 in Frankfurt both added 0.6%. At the equities close, the euro was quoted at USD1.1134, compared to USD1.1175 at the same time Wednesday.

In New York, stocks were higher at the European equities close, with the Dow 30 flat, and the S&P and the Nasdaq Composite both up 0.1%.

Gold was quoted at USD1.363.19 an ounce at the equities close, against USD1,357.14 on Wednesday, while Brent oil stood at USD43.30 a barrel, compared to USD42.47 on Wednesday.

Highlights in the economic calendar Friday are UK Halifax house prices at 0830 BST, and US nonfarm payrolls at 1330 BST. The US Baker Hughes US oil rig count is at 1800 BST.

In the UK corporate calendar, Royal Bank of Scotland Group, Ibstock, William Hill, Esure Group, and Kennedy Wilson Europe Real Estate all report half-year results. Bellway and S&U issue trading statements.

By Daniel Ruiz; danielruiz@alliancenews.com

Copyright 2016 Alliance News Limited. All Rights Reserved.