Interactive Investor

Carney inspires jaw-dropping rally

30th June 2016 16:57

Lee Wild from interactive investor

It's difficult to stop gawping at the trading screens. Within minutes of Bank of England governor Mark Carney's 'reassurance' speech at 4pm, the FTSE 100 added 91 points, smashing its way to a new 10-month high above 6,500. By all rights the index should be 1,000 points lower given the uncertainty created by the Brexit vote. So what did Carney say that was so good?

The answer is quite a lot. Crucially, the Canadian has taken a leaf out of ECB president Mario Draghi's book, giving markets the nod that he'll do whatever it takes to keep the economy from crumbling.

"The near-term challenges facing the UK economy can’t be wished away," he said. "But they can be addressed. A clear plan is needed, and its measures must be implemented with resolute determination.

"…I want to re-emphasise that the Bank has taken all the necessary steps to prepare for these events. And we will not hesitate to take any additional measures required to meet our responsibilities as the United Kingdom moves forward."

While Carney said he was not pre-judging the views of the other independent MPC members, he admitted that the economic outlook has deteriorated and that "some" monetary policy easing would probably be required "over the summer".

We're told that contingency plans put in place by the central bank, chancellor and HM Treasury "are working well", and that a "host of other measures and policies" will be considered in the coming weeks to promote monetary and financial stability.

That's widely accepted to mean an interest rate cut as early as next month. Further quantitative easing could also be unleashed if things turn bad.

That's exactly what traders wanted to hear. It's why the FTSE 100 has powered above 6,500 to levels not seen since last August, on the eve of the second Chinese stockmarket crash.

It's up 8.7% since Monday's close and the blue chip index has now registered triple-digit gains for each of the past three days. Driving Thursday's 144-point surge was a real mixed bag, led by private equity giant 3i, up over 8%. Utility SSE, publisher Informa, copper miner Antofagasta, and shopping centre-owner Intu Properties make up the top five risers. And I wrote earlier that the rally was not broad-based!

However, the speech was not without warning, and the tone certainly sours as you wade through the 16 pages of text and charts.

"…one uncomfortable truth is that there are limits to what the Bank of England can do. In particular, monetary policy cannot immediately or fully offset the economic implications of a large, negative shock," warns Carney.

"The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policymakers."

Carney and his team will be sifting through the evidence and hard data over the next few weeks to "estimate the extent of the deceleration" as the Bank formulates its August projections.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser