The rebound in stock markets and the pound towards the end of last week and the beginning of this week has been absolutely stunning in the sharpness of its reversal, as investors got caught the wrong side of a face ripping rebound.
A combination of a weaker US dollar and the disappearance of the “Leave” lead in some weekend opinion polls has seen a significant reappraisal of some of the more extreme positioning which was characteristic of some of last week’s price action, not only in bond markets but also in other safe haven assets.
Given the extent of yesterday’s rebound the big question is do the currency markets know something we don’t? The pound has enjoyed the mother of all short squeezes surging across the board as opinion polls which had been moving in the “Leave” camps direction last week started to move back towards “Remain” with less than 3 days to spare until voting day.
Having seen sterling 1 month volatility to rise to its highest levels since 2008 last week there was always the risk that the market was becoming overstretched towards the downside and the rebound seen in the past day or so would seem to suggest that was indeed the case, but despite the change in the polls the race still remains too close to call.
Financial markets appear to be taking the view that the race may well already be run, which given the twists and turns seen already in this campaign may well be extremely far sighted, or dangerously premature.
With more polls due out later today we can expect to see further volatility unfold in the event of a move either way.
As we look ahead to another choppy day European markets look set to pause for breath today, opening mixed after the FTSE100 enjoyed its best one day gain since August last year, surging over 3% yesterday.
Even allowing for the strong gains seen in the last couple of days and the recovery in risk appetite, stock markets in Europe are still down on the month, plagued by the same concerns that were worrying investors a week ago as low and negative yields hammered banking and financial stocks.
While yesterday’s rebound in risk was helped by a shift in the polls towards “Remain” the reduced prospect of an imminent Fed rate rise could well have helped as well given last week’s comments by St. Louis Fed President James Bullard when he suggested that in his view the prospect of multiple Fed rate rises was becoming ever more distant. This was, and is a remarkable shift in narrative from someone who last year was one of the more notable Fed hawks.
Later today Fed chief Janet Yellen begins her two day semi-annual testimony to US lawmakers fresh from last week’s rate meeting where we saw US rates left on hold. She also gave the impression of being rather concerned about the recent slowdown in the pace of jobs growth and her discomfort about committing to the next meeting or two about the prospects of a rate rise were in stark contrast to recent comments that a rate rise would probably be appropriate in the coming months.
On the data front we will be getting the latest UK public finance numbers for May which are expected to show a sharp increase to £9.6bn from April’s £6.6bn.
In Germany there are two things to watch out for, firstly a ruling of the German constitutional court on the legality of the ECB’s OMT program, after deferring a decision earlier this year. The European Court of Justice has already ruled that the program is legal under certain conditions, however the German court will be ruling on a number of test cases which are it is hoped will force the court to put limits on how much the Bundesbank can participate in what was an untested and unlimited program.
The latest German ZEW survey is also expected to show a slight deterioration in June to 5.1 from 6.4 in May.
EURUSD – the euro ran out of steam just below the 1.1400 area yesterday but the recent uptrend still remains intact with support at 1.1280 as well as trend line support from the December lows just above the 1.1100 area.
GBPUSD – the rebound in the last couple of days has seen the pound push up to the 1.4710 level trend line resistance from the May highs and the 200 day MA. A move through here could well trigger a move towards 1.4900. Pullbacks could well be sharp but should find support at the 1.4330 level.
EURGBP – yesterday’s plunge saw the euro slide below the 0.7760 area and head back to the 0.7690 area. If we fall below the 0.7560 area and the May lows we could well see further losses towards 0.7330. Resistance now comes in back at 0.7760 and 0.7830.
USDJPY – having broken below the 105.50 area as well as the 200 week MA, the US dollar looks set for a move towards 100.70 and the 2014 lows. We need a recovery through the 105.50 area to help stabilise.
