More QE on the cards as FTSE hits 6400 and Sterling weakens

<p>Minutes from the previous Bank of England MPC showed three committee members voted to increase asset purchases, including that of Governor Mervyn King, and thereby […]</p>

Minutes from the previous Bank of England MPC showed three committee members voted to increase asset purchases, including that of Governor Mervyn King, and thereby giving the markets a sure fire indication that the bank is getting closer to expanding quantitative easing (QE).

The FTSE 100 powered to the 6400 level, a level not seen since January 2008, as investors continued to buy into blue chip UK listed stocks on brightening (or rather less weaker) prospects for the eurozone after positive forward looking data out of Germany and central banks seemingly happy to tread along the stimulus path, despite this path being laden with potholes of ‘currency wars’ allegations.

The MPC minutes from the BoE’s last meeting were certainly a positive surprise. Whilst no change was expected on voting to keep rates on hold, three members (Miles, Fisher and Mervyn King) voted to increase stimulus by £25bn to £400bn.

David Miles has now voted for an increase in stimulus by £25bn in the last four policy meetings and so the real surprise is that for the first time since July last year, there is now more than one committee member voting for additional stimulus. The last time there was a vote of 6-3 against increasing stimulus, the following month the MPC voted by 7-2 to increase asset purchases. This sentiment change in the MPC is telling and the market is now expecting more QE to be announced by the BoE in the near term.

As a result of the minute’s release, we saw sellers of sterling continue to emerge to force the pound lower by 0.8% against bith the euro and US dollar. The pound has now lost as much as 10 cents against the dollar to trade at its lowest levels since June last year. Whilst the continued drop in the value of the pound maybe welcome news for exporters, as it makes UK goods cheaper to buy for non sterling holders and thereby increasing demand, UK purchasing power abroad is weakening. As such, this is not a welcome sign for Brits looking for holidays which now become more expensive as a consequence.

UK employment at record high
The UK unemployment rate nudged higher to 7.8% from 7.7% whilst jobless claims fell by 12,500, which was much more than expected. The number of people in work also rose to 19,730m – a new all time high – but the fact that average weekly earnings fell to 1.4%, its lowest levels since April last year, remains a deep concern particularly with inflation rising and expected to rise even more if the BoE now increases asset purchases.

FTSE tops 6400
The FTSE 100 continued to show remarkable bullish momentum, trading back above the 6400 level for the first time since January 2008. The UK benchmark index was supported by gains made in energy firms and insurers and comes despite weakness in heavyweight mining firms such as BHP Billiton and Rio Tinto.

With 6400 being a key level, it now becomes important for the Index to consolidate above this level. A failure to close above 6400 this week could see investors start to lock in their gains and this could trigger a corrective move.

BHP Billiton appoints Mackenzie
The move by BHP Billiton to replace Marius Kloppers with Andrew Mackenzie is a safe move that should give shareholders greater confidence.

Kloppers has long had a cloud over himself due to his spectacular failures in M&A including Potash Corp and Rio Tinto. He had been expected to move aside. The internal appointment of Andrew Mackenzie, a former BP and Rio Tinto man, will do much to provide a sense of consistency to shareholders and will continue the firms drive for both cost and output efficiency. BHP announced a 43% drop in half year profits to $5.68bn, broadly in line with expectations.

We must not forget also that BHP Billiton shares have been a strong outperformer of late. Since June last year, when the broader market hit a bottom, shares have rallied as much as 38% compared to a 22% rise for the FTSE 100 in the same timeframe. In that sense, the 2% fall in share prices today should not be interpreted as shareholder reaction to the appointment of Mackenzie.

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