The U.K vote to leave the EU will obviously dominate the summits of European heads of government and global central bankers this week.
Beginning today, central bankers gather for at a three-day meet in Portugal. What many may have considered a boring topic “The Future of the International Monetary and Financial Architecture” should be rather apropos given the financial market fallout after last week’s shock ‘Brexit’ vote. Not sure whether BoE’s Governor Carney will have the time to fulfill his speech commitment given the need for all hands on deck to shore-up investor confidence in Britain.
On Tuesday, heads of government of the EU’s member countries will gather for a two-day meeting of the European Council in Brussels. Will this be an amicable divorce or a bitter one for the U.K? The EU is going where it’s never gone before. Will they be able to come away with a new road map for Britain?
On Friday, the first day of July marks the initial release of global manufacturing data for the month of June – U.S’s ISM, China, Japan and much of Europe.
1. Pound falls further
It comes as no surprise to see Sterling (£1.3206) starts the week again under intense pressure, dropping -2.1% on the open (closed Friday £1.3661) in another volatile trading session in Asia. The EUR is still playing catch up, down only -0.61% to €1.1014 outright.
Late Friday, Moody’s Investors Service lowered its ratings outlook on the U.K. to “negative” from “stable.” Early this morning, British Chancellor of the Exchequer, George Osborne, issued a statement shortly before U.K markets open.
“The Treasury, the Bank of England, and the Financial Conduct Authority have spent the last few months putting in place robust contingency plans for the immediate financial aftermath in the event of this result,” said Mr. Osborne. His comments were only able to give a temporary tentative boost to the pound.
With the lack of clarity from the U.K has been able to undermine market confidence. Currently, market conditions remain somewhat fluid, with dealers noting currency volumes above expectations across the board. Demand for safe-haven currencies like the yen and the ‘big’ dollar remain the go-to trade at the moment.
China weakened its yuan fixing by the most since last August. The PBoC’s first fixing since Brexit set the yuan setting at its lowest setting in nearly six-years. The onshore yuan last traded -0.4% weaker at ¥6.6388 outright.
The U.K. is facing a vacuum at the top levels of its leadership – Conservative PM David Cameron resigned Friday and Labor leader Jeremy Corbyn’s saw 12-members of his shadow cabinet resign after losing faith in their leader.
2. Euro markets pressured by Brexit
Central bankers remain on high alert, and continue to be front and center. Their aim is to instill calm and market confidence in the global financial system.
Their presence during the Asian open overnight provided a modest rebound in Asian equities. However, the continued bitter aftertaste in Europe to the U.K.’s vote to leave the EU is again pressuring their regional bourses.
The Stoxx Europe 600 fell -1% in early trade as investors contemplated increasing political and economic uncertainty around the U.K. and Europe. Amid the losses, however, Spain’s IBEX 35 has rallied +3% after Prime Minister Rajoy’s Popular Party did better than expected in last Sunday’s national elections (elections delivered a hung parliament for the second time in six-months).
In Asia, equities managed a modest rebound following Friday’s heavy losses (Asia bore the brunt of U.K’s negative vote). The Nikkei Stock Average gained +2.4% after an adviser to PM Abe suggested that Japan now has a “little more ground” to rationalize intervening in the currency markets. The Shanghai Composite Index added +1.5% after the PBoC weakened the yuan by the most since August, even as shares in Hong Kong edged down -0.5%.
U.S. stock-index futures indicate more trouble for equities on the open, one session after the S&P 500’s worst selloff in ten-months on Friday.
Indices: Stoxx50 -0.6% at 2,763, FTSE -1.0% at 6,077, DAX -0.9% at 9,473, CAC-40 -0.8% at 4,073, IBEX-35 +0.3% at 7,808, FTSE MIB -0.4% at 15,658, SMI -0.3% at 7,723, S&P 500 Futures -0.2%
3. Gold holds its biggest one-day surge in four-years after Brexit
The ‘yellow’ metal has rallied +25% this year with support coming from two main areas – the Fed holds off on tightening monetary policy, and NIRP (negative interest rates) being embraced in Europe and Japan.
Now that the Brexit referendum is adding to uncertainty in global markets, speculators and investors are also supporting gold prices.
Bullion for immediate delivery climbed +0.9% to $1,330 ahead of the U.S open. The metal surged to $1,358.54 on Friday. The +8% intraday surge was the biggest in over two-years. Gold bulls are eyeing a $1,400 handle by year-end.
4. How low can global yields go?
During times of uncertainty, investors tend to flock to own sovereign bonds. The volatility that has been ever-present in equities and currencies since U.K’s shocking Brexit vote has not gone amiss in the bond market.
Government benchmark Tier I product is trading like a ‘hot’ commodity. The yield on the benchmark 10-year U.S Treasury was +1.5% this morning, up from Friday’s +1.419% low and down from the previous day’s close of +1.74%.
The inconclusive result of yesterday’s Spanish general elections is providing some support German bunds. Analysts note that technical factors are also on the bund’s side – most of the German curve is now ineligible for ECB purchases as their yields trade below the -0.4% deposit rate. This is forcing the ECB to buy longer dated issues, which is only flattening the German curve further.
The yield on 10-year U.K. government bonds dropped below +1% (+0.996%) this morning, as investors continued to bet on the BoE ramping up monetary stimulus. The yield was trading north of +1.35% ahead of last week’s vote.
5. Verbal intervention remains heavy in Japan
USD/JPY was off over -0.5% to test below ¥101.50, but still comfortably above the ¥98.98 low seen on Friday (November 2013). Verbal intervention remains heavy in Japan, where PM Abe held a meeting with BoJ Deputy Governor Nakaso and Finance Minister Aso.
Abe said it was critical to strive for greater market stability amid uncertainty following the Brexit vote, adding he has given instructions to “take all necessary measures in FX markets.”
Many dealers are looking for JPY to test ¥95.00 before they see the Bank of Japan (BoJ).