By Dean Popplewell
Risk on sentiment continues to thrive across the various asset classes.
For a second consecutive session, political clarity and stronger fundamentals are temporarily providing the market with support. There has been no letup from the euphoria of a very strong June non-farm payroll print from last week, while political risks in the UK, Japan, and Australia has abated, at least for the time being.
The S&P 500 closed above its previous all time high yesterday, and is set to open in the black this morning. US Treasuries have fallen sharply, allowing yields to back up from their historic low prints, supported by the ‘big’ dollar’s rallying to a ten-day high against the yen (¥103.42) following Prime Minister Abe’s call for fresh fiscal stimulus.
Sterling remains the biggest talking point for currency traders ahead of Thursday’s Bank of England’s (BoE) monetary policy meeting. The possibility of the BoE cutting interest rates to a new record low and the premise of political stability are making it difficult to anticipate sterling’s next move.
1. Pound jumps on May
Sterling continues its strong rally this morning, rallying +1.3% outright to print a one-week high of £1.3167, ahead of the open stateside on news that Theresa May will be appointed Prime Minister after Andrea Leadsom on Monday withdrew from the Conservative leadership contest.
May is to be appointed UK’s second female Prime Minister tomorrow. Previously it had been expected that a new leader would not be in place until late September and that it would have involved a “dirty” leadership campaign.
UK politicians can now get to work on Brexit details behind the scenes much quicker.
2. Risky currencies rise as JPY and USD drop
The great safe-haven unwind? Not necessarily so, but a small relief rally for currency pairs that have come under pressure since last month’s Brexit vote.
The EUR and riskier currencies are on the rise this morning against the safe haven yen and the dollar on the view the US economy is recovering after last week’s solid jobs data, combined with expectations the Fed will not raise rates on the back of the UK’s Brexit vote.
EUR/USD is up +0.4% at $1.1107. USD/JPY hits its highest since the UK vote at ¥103.61, EUR/JPY is up +1.4% and GBP/JPY up +2.4%.
Among riskier currencies, AUD/USD has rallied +1.2% to a two-week high A$0.7639, while Canada’s loonie (C$1.3043) is finding it a tad more difficult to keep pace with other commodity sensitive currencies ahead of the Bank of Canada (BoC) rate announcement tomorrow.
3. Stocks trade in the black
Global equity indices are once again trading sharply higher as political uncertainty in the UK subsided, with expectations for an upcoming rate cut by the Bank of England, as well as a positive end to the Asian session on stimulus expectations, added to risk-on sentiment overall.
After yesterday’s +4% rally, the Nikkei225 is up another +3% overnight. Weakness in the yen, fueled through expectations of a liberal fiscal stimulus response to low inflation continues to provide support. Overnight, PM Abe confirmed the stimulus, but not the amount.
In Europe, financial stocks are leading the gains while the FTSE 100 is being led by construction as post-Brexit fears continue to subside.
The unofficial start of the US earnings season will keep investors busy stateside with Q2 results.
Indices: Stoxx50 +1.7% at 2,932, FTSE +0.1% at 6,691, DAX +1.3% at 9,965, CAC-40 +1.5% at 4,328, IBEX-35 +2.0% at 8,470, FTSE MIB +2.2% at 16,616, SMI +0.1% at 8,123, S&P 500 Futures +0.5%
4. Global yields back up for now, but for how long?
US 10-year Treasuries (+1.48%), UK gilts (+0.77%) and German bunds (-0.12%) trade lower this morning following the removal of uncertainty regarding the UK’s conservative leadership.
Another factor putting pressure on US Treasuries is a full slate of new bond sales this week. US dealers are making room to take down 10-year and 30-year bond product starting today and tomorrow.
Britain’s vote to leave the EU last month has been the latest catalyst to the downward spiral of sovereign yields to record lows. The Brexit vote result has convinced the market to slash their global growth forecasts and predict more central-bank stimulus due to the political and business uncertainty the vote unleashed.
The impact of Negative Interest Rate Policy (NIRP) has seen the pool of negative debt substantially rise. There is now $13-trillion of global negative-yielding debt versus the $11-trillion before the Brexit vote. Two-years ago there was barely none with a negative yield.
Despite crude-oil prices paring some of their last week’s losses, they continue to hover around its two-month low as a pick up in U.S. oil drilling activities and supply growth elsewhere supports the market view that a market rebalance will take much longer than expected.
August WTI futures currently trade at $45.56 a barrel, up +$0.82, while September’s Brent crude has rallied +$1.00 to +$47.26 a barrel.
Despite the minor gains, both grades are down more than -3% from a week ago.