UK Reveals Lending Scheme
The BoE and UK Government announced details of their funding for lending scheme. The pound was largely unchanged on the announcements (since the surprise element of the June announcement was not there), though we expect pro-active policy to be rewarded by investors so, on the margin, would see it as a slight GBP positive. UK banks will be able to borrow 5% of existing lending stock from the BoE, (approx £80bn). The scheme will be open for 18 months and the funds accessed will last for 4 years. The structure of the borrowing costs, low (25bp) if banks increase lending and higher (1.5%) if lending falls, is designed to encourage lending. UBS economics note that while this scheme is a big step in the right direction, the key worry is that there simply isn’t the demand for loans. Elsewhere, FX markets were fairly quiet, the euro gained slightly after a strong Italian auction, where the treasury sold 3.5 bn of the July 2015s (at a yield of 4.65% (5.30% previously). This came in spite of Moody’s decision to cut Italy’s sovereign rating by two notches to Baa2. The ratings agency cited an increased risk that funding costs could rise further, possibly leading to a “sudden stop in market funding”. We continue to look to fade any brief euro rallies in the current environment, looking for a structural move lower versus the dollar, yen and sterling. A barrage of China economic data came in slightly ahead of consensus (on balance) and this gave risk currencies a modest bid tone GDP grew by 1.8% q/q (cons. 1.6%) and 7.6% y/y (cons. 7.7%). Fixed asset investment accelerated slightly suggesting the government’s stimulus measures are already bearing fruit and are starting to make their presence felt in the economic data. Meanwhile in the US, the steeper than expected 26k drop in US initial jobless claims (which pulled the 4-week moving average down to 376k) reflected some seasonal distortions, and the muted USDJPY reaction was testament to the high degree of caution which still lingers in the market. A quiet data calendar in Europe today means attention will probably fall on Swiss import prices and Italy’s sovereign debt auction (especially in the wake of the overnight downgrade).
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank