There are several critical events taking place over the next two-weeks that will keep capital participants on their toes.
This week will be dominated by central bank activity and rhetoric. While next week, the focus is all on the U.K and its Euro membership referendum (June 23).
The Bank of Japan (BoJ), the Bank of England (BoE) along with the Federal Open Market Committee (FOMC) and Swiss National Bank (SNB) all meet in the latter half of this week. There are no policy changes anticipated by either institution, but it’s what policy makers actually say that will dictate capital market direction.
The most important will be the Fed. U.S policy makers will release their “dot plot” – projected interest rates- at 2 p.m. EDT on Wednesday, alongside a policy statement and new economist forecasts. This will be followed by a highly anticipated press conference by Fed Chair Janet Yellen.
1. Brexit worries cripple Sterling
Risk aversion remains the prevailing sentiment for the third straight trading session.
Financial markets are clearly getting nervous with the latest U.K polls over the weekend showing gaining momentum and possibly even a narrow lead for the pro-Brexit camp.
The possibility of the U.K. voting to leave the EU in next week’s referendum (June 23) has sent the pound plummeting to a new two-month low of £1.4118 outright and €0.7985 vs. the Euro.
Against safe haven pairs, it has dropped more than -1.4% against the day’s best performing currency, the Japanese yen, to hit ¥149.56, its lowest print in nearly three-years and to a two-month low against the Swiss franc, around £1.3626.
GBP one-month implied volatility (demand for options protection) hit 28.15 this morning, – this is above the 28.0 peak in late 2008 after the collapse of Lehman Brothers. This would suggest that investors fear a greater potential for pound to fall if the U.K. votes to leave the EU.
ORB/Independent online poll: 45% for remain in EU, 55% for leave (prior 49% for remain in, 51% for leave)
Sky News: 47% for remain in EU, 53% for leave
Opinium poll: 44% for ‘remain’ in EU, 42% for ‘leave’ (prior 43% remain, 41% leave)
YouGov Times poll: 42% for staying in EU, 43% to leave (prior 43% for staying in EU, 42% to leave)
2. Risk aversion positioning dominates
Growing anxiety over the prospect of the U.K. exiting the EU is spooking the global investor and hammering equities.
Equity indices are beginning the week trading sharply lower as investors remain risk-averse ahead of the key central bank meetings this week, and next weeks U.K Brexit referendum.
European shares have fallen for a fourth day on the back of Asian bourses sliding to a new two-month low.
Indices: Stoxx50 -1.5% at 2,870, FTSE -0.4% at 6,093, DAX -1.4% at 9,697, CAC-40 -1.5% at 4,244, IBEX-35 -1.6% at 8,355, FTSE MIB -2.4% at 16,715, SMI -1.1% at 7,835, S&P 500 Futures -0.3%
3. Soft China Data, but looking up……
In overnight releases, China’s May economic data was generally in line or softer than expected.
Fixed urban investment growth slowed to a multi-year low as property sales value and construction activity saw prominent declines (Fixed urban assets YTD, Y/Y +9.6% vs. +10.5%e).
China’s industrial output was considered more mixed. Analysts note that power generation recovered from last month’s decline, while crude steel output showed slightly higher growth, even though the overall headline print was as expected (+6.0% vs. +6.0% e).
Adding to evidence that the world’s second-largest economy is stabilizing, China Stats Bureau noted that overall employment is steady and investment is growing and this despite the world’s second largest economy still facing uncertainties.
4. Crude and Gold go their separate ways
Oil prices are kicking off the new week in the red after U.S. drilling data showed another increase. Higher crude prices are motivating producers to restart closed wells and maybe increase supply.
Brent briefly fell below $50 a barrel for the first time in a week, while WTI futures are trading down -1% at $48.59 a barrel as we head stateside.
Crude prices have rallied by more than +80% from its mid-February lows, supported by production outages from Nigeria to Canada and falling output in the U.S.
Gold is trading atop of its four-week high ($1286.70) buoyed by a benign Fed policy as well as safe haven demand due to the U.K’s upcoming Brexit vote.
5. Global yield continue to fall
G7 debt paper continues to rally hard with the global equity selloff.
The yield on the 10-year German bund touched an all-time low of +0.01% as the ECB kicked off the purchases of corporate bonds as a part of its ongoing QE program. Dealers believe it’s only a matter of time before German 10’s trade below zero into negative territory.
The yield on the 10-year gilt has also hit an all-time low of +1.21% this morning. Japan’s 10-year and 20-year JGB yields are now trading deeper into negative territory. Japan’s 10-year JGB yield is at record low of -0.145%.
With domestic yields so low, investors continue to scour the globe for returns. It’s this foreign demand that has U.S Treasuries better bid further out the curve.
The U.S 10-year yield has dropped from +1.80% ahead of last month’s payrolls report to +1.625% this morning, its lowest level since February.