Archive

Hedge in May and Go Away

• A sharp rise in market rates drove down equity prices in April. The correlated move was consistent with our suggestion before Easter to hedge the downside with equity options.
• We now believe the front end is broadly flat enough, so we have turned neutral on rates relative to the market despite being more hawkish than the consensus on the BoE.
• The potential for market expectations to overshoot again, extending the bearish trends, means hedging with options may still appeal over selling or hoping for recovery.

By Philip Rush

HEM: Molting Hawk Feathers

• Rolling rate cuts have flattened the front end enough
• Hikes are unlikely despite limited cuts coming later
• Market pricing may overshoot before we become dovish
• Our Nov-24 BoE call is still slightly later than priced
• A Fed delay beyond Sep would slow ECB cuts after June

UK Politics: Early Election?

• Whether or not the overall outcome of this week’s local elections and by-election is as bad for the Conservatives as expected, Rishi Sunak may be increasingly inclined to give serious thought to a snap general election as challenges mount.

By Alastair Newton

BoE Throwing Cats Among Pigeons

• Comments from BoE MPC members have roiled market pricing recently amid perceived contradictions between each other and the hawkish flow of macro data.
• Members make different risk assessments that vary the evidence required to cut. Shocks this month are insufficient to break the dovish belief in disinflationary progress.
• Further resilience would encourage MPC members to delay their dovish hopes, just as it did with the FOMC. An unlikely hasty cut risks repeating the BoE’s 2005 policy error.

By Philip Rush