KATHLEEN BROOKS | FOREX.COM
THE major surprise from last week was not only that the Bank of England would pump another £75bn into the UK economy, but also the resilience of the pound. Sterling rallied against all of the major currencies last week and reversed its initial decline immediately after the announcement. So is the pound defying gravity? Traditionally, QE is negative for a currency, since it swamps an economy with money. Not only is the supply of sterling going to increase over the next few months, but we still don’t know how well the economy will digest this boost to the money supply when we are in a period of household deleveraging. Thus, we are a seller of pounds on rallies towards $1.5600.
However, the outlook for stocks may be better. The other effect of QE is that it depresses gilt yields; this makes equities look attractive to us, especially banks. The whole world is hunting for yield right now, and with the major central banks acting to depress yields the best option is stocks. One of the stated aims of QE is to help reduce stress in the banking sector. This could boost bank stock prices, which have been under intense pressure in recent months. Since financials are such an important component of the FTSE 100, QE should benefit the overall UK index.
ANGUS CAMPBELL | LONDON CAPITAL GROUP
THE tide seems to have been changing in the last few days as investors see coordinated action by European leaders to try to quell the crisis.
And now it seems central banks are determined to do their bit to prevent a possible double dip recession.
After having crowed so loudly about the success of their first quantitative easing program to date only a few weeks ago, there was always a chance that the Bank of England would extend it last week.
Even if they hadn’t then next month it was almost a certainty.
Now QE2 is here for the UK, the central bank’s action will give a boost to the British economy, just as it did back in 2009 through to 2010.
However, the fear is that this will simply be a temporary and artificial boost that, at the same time, will send inflation higher and in the longer run actually cause more misery for UK consumers who are already under so much pressure from rising prices.
We have certainly seen this play out in the past and there is apparently little reason to suggest that this time round it will be any different. The announcement saw the FTSE react positively to the news with a continuation of its rally and sterling understandably got hammered.
DAVID JONES | IG INDEX
THE decision by the Bank of England to launch QE2 on Thursday came as a surprise to markets, which maybe weren’t expecting it to happen so quickly, and secondly in the size announced. The biggest impact was felt by the pound with sterling-dollar dropping 200 points in very short order – although these losses were all regained within the next 24 hours. This is a fair barometer of the confusion felt by this latest announcement – is it actually going to change much in the economy? Arguably it made more sense when we were coming out of the last financial crisis – beaten up banks were reluctant to lend and this was seen as a helping hand.
But the lack of willingness to lend is some way down the list of problems we are facing at the moment. Although QE can help placate markets in the short term – if the US decides to follow suit it would be expected to give another fillip to global share prices – investors are far more concerned with the ever-present European debt crisis and the stalled economic recovery. Is QE really going to have that much of an impact, or even any, on kick-starting the economy? The Bank of England clearly felt the need to take some action – but it looks likely that focus will be back on the two usual issues again very quickly and it is difficult to see much headway for stock markets while these remain unchanged.