Equity markets enjoyed a strong rebound yesterday helped in no small part by a reassessment of the risk outlook in the wake of last week’s referendum outcome. With no likelihood of Article 50 of the Lisbon Treaty getting triggered any time soon it seems that the status quo isn’t likely to change in the short term, with an emergency EU Summit scheduled in September being pencilled in for a new UK Prime Minister to submit plans for next steps.
Whilst that doesn’t remove the uncertainty with respect to the eventual outcome it also means that markets are going to have plenty of time to settle into their new found reality and equilibrium, as the extra time allotted could well see cooler heads prevail as some of the temperature is taken out of what still remains quite a tense situation. It may well become clearer later today who intends to enter the race to succeed outgoing PM David Cameron with Boris Johnson and Theresa May likely to throw their hats into the ring.
The rebound in Europe continued into the US session sending US markets to their best one day gain in nearly 4 months and this follow through looks set to see European markets open higher this morning, as investors cautiously dip their toes back into the market.
The health of the banking sector still remains a concern, however UK banks remain much more resilient than their counterparts in Europe and yesterday’s rebound does appear to reflect that, with Lloyds Banking Group’s more domestic focus helping its shares rebound the most, though low bond yields continue to be a significant drag on the sector’s profitability.
The pound has also rebounded as sentiment starts to stabilise in the wake of last week’s surprise UK referendum vote outcome. If we manage to hold above the recent lows we could head back towards 1.3650, though in the longer term the risk does remain to the downside.
ECB President Mario Draghi’s comments that we could see a slowdown in EU GDP, of about 0.5% could well see the ECB remain ultra-accommodative in the coming months given that the sharp depreciation in the pound could well trigger a deflationary wave across Europe as a result. Even so the ability of the ECB to take any meaningful action remains limited while the banks remain weak.
Today’s latest CPI numbers from Germany and Spain look set to show that inflationary pressures remain benign, with Spanish flash CPI set to show prices slide 0.9% year on year.
In the UK the latest lending numbers for consumer credit and mortgage approvals are expected to show that lending remained resilient in May, though recent events could well see a sharp slowdown this month.
Yesterday’s US Q1 GDP numbers showed that personal consumption in the first quarter was weaker than expected at 1.5%, the lowest since 2014, and while recent data shows that may have picked up in Q2 the today’s personal spending numbers for May will struggle to match the jump of 1% seen in the April numbers. It is expected that we’ll see a rise of 0.4%.
Irrespective of how goods these numbers are given the market fallout of the recent Brexit vote the odds of a US rate rise this year have pretty much disappeared with markets actually pricing in a 15% probably of the next move in rates being a rate cut, with a 10% probably of a hike in December.
EURUSD – continues to struggle near the 200 day MA just above the 1.1100 area, which keeps the pressure on the downside and could well see a move towards the March lows at 1.0825. To stabilise we need to see a move back above the 1.1250 area.
GBPUSD – appears to have found some support around the 1.3120 area, rebounding towards 1.3400. To stabilise and mitigate the risk of a move below 1.3000 towards 1.2800 we need to see a move back through the 1.3650 area.
EURGBP – has slid back from the 0.8370 area the 2014 highs as well as the 50% retracement of the move from the 2008 highs at 0.9802 to the 2015 lows at 0.6934. A move through here could well see a move towards 0.8706. Support comes in at 0.8120, and the April highs.
USDJPY – has managed to stay above the 100 level after rebounding from 98.95. We need to get back through the 103.50 area to retest the 105.50 area. A move below 100.00 is likely to prompt the risk of further losses and possible BoJ intervention concerns.
