Post-Brexit Market Moves Reversed Slightly Ahead of EU Council Meeting

June 28, 2016

The dollar settled back 0.9% against sterling and the kiwi, 0.8% versus the Australian currency, 0.7% relative to the loonie, and 0.6% vis-a-vis the euro and yen.  The yuan and Swiss are mostly unchanged.  Emerging market currencies did better today as well.

Ten-year sovereign debt yields rebounded six basis points in the U.K., 3 basis points in Switzerland and Germany and four bps in U.S. Treasury futures but have dropped 4 bps in Japan, 7 bps in Australia, 8 bps in Spain,and 6 bps in Italy.

Among commodities, Comex gold fell back 0.8% to $1,312.20 per troy ounce, while West Texas Intermediate oil advanced back 2.7% to $47.58 per barrel.

A relief rally has occurred in European share prices following the heavy sell-off of Friday and Monday.  Stocks are up 2.5% in Britain, 4.7% in Greece, 4.3% in Italy, 3.1% in Spain, 2.4% in Switzerland, 2.8% in France and 2.3% in Germany.

Stocks in the Pacific Rim rose 1.0% in Indonesia and Singapore, 0.6% in Taiwan and China, but just 0.1% in Japan.  And Australia and Hong Kong suffered 0.7% and 0.2% losses.

Consider these reversals a pause, based on hopes that the market’s debacle previously will spur stimulative macroeconomic countermeasures led by the central banks.  Investors are especially focused upon the 2-day meeting in Brussels of EU leaders (known as the European Council), which kicks off with dinner today including Britain’s lameduck Prime Minister Cameron, but he will not be present at tomorrow’s session, when a coordinated Brexit negotiating strategy will be discussed.  A lot of hostility exists between Cameron and his EU colleagues now, and it will be hard for the EU to settle on an amiable, efficient, predictable, and supportive approach.

Meantime, verbal hints of intervention enabled the yen to weaken back through the key 100/$ dollar barrier from a peak of 99.1 hit last Friday to the middle of a 100-105 band currently.

As for Britain, S&P announced a two-notch downgrade in that economy’s sovereign debt credit rating to AA from AAA, which followed an early downgrade by Fitch to AA from AA+.  U.K. politics remain extremely confusing both in the Conservative and Labour Parties.  Selection of a new prime minister is holding up the process of nailing down a timetable including when Britain will invoke Article 50 of the Lisbon Treaty.  Once that happens, full Brexit should follow within two years.

The CBI’s monthly survey of British distributive services produced a smaller-than-feared 3-point slide to a reading of +4, a two-month low, but that drop doesn’t reflect the Brexit vote reality and the ensuing negative market reaction.  British bank share prices and travel-related corporate equities really hit the skids.

French consumer confidence slipped a point as expected in June to 97 but remained above the 94 readings of March and April.  Italian consumer confidence sank 2.3 points to a 10-month low in June of 110.2.  That drop had not been foreseen.  Italian confidence in manufacturing and construction rose somewhat, but overall economic sentiment fell.

German import price deflation was alleviated in May by a 7.0% month-on-month recovery of energy. A 5.5% on-year decline was the smallest since January.  Export prices slid 1.6% on year.

Swedish producer prices (down 4.5% on year in June), retail sales (up 4.6% in volume terms on year in May) and trade balance for May (a surplus of SEK 2.1 billion versus SEK 1.8 billion a year earlier) were reported.  The year-to-May surplus of SEK 5.4 billion is only about a third the SEK 16.8 billion size recorded a year earlier.

Spanish retail sales growth slowed to 2.3% on year in May from 4.0% in April.

Icelandic CPI inflation of 1.6% in June returned to the March level after being 1.7% in April and May.

South Korean consumer confidence posted readings of 99 in May and June following 100 in the previous two months.  The government in Seoul unveiled plans for a 20 trillion won fiscal stimulus.

Scheduled U.S. data to be reported today feature the final revision of 1Q GDP, plus monthly readings for consumer confidence, the Richmond Fed manufacturing index, and the S&P Case Shiller index of home prices in the leading 20 metropolitan markets.

The rest of this week will see a heavier and more meaninful flow of statistical reports from around the world.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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