Tuesday’s Market Rebound Extended

June 29, 2016

European share prices have risen an additional 2.8% in Spain, 2.5% in France, 2.4% in the U.K. and Italy,  2.2% in Switzerland, 1.9% in Germany and 1.2% in Greece.

Sterling is trading currently at $1.3421, up another 0.6% and 2.3% above the 30-year low seen on Monday.

The dollar has also settled back 1.0% against the kiwi, 0.7% relative to the Aussie dollar and 0.3% vis-a-vis the loonie, but its unchanged against the yen and just 0.1% softer relative to the euro.  Emerging market currencies have advanced, especially the rand and won.

The main factor for calming markets is not confidence about how EU-British talks will go but rather the strengthening belief in coming macroeconomic support from a variety of places.

  • Expectations of a next Federal Reserve rate hike have been pushed back at least to December and by some to 2018.  Near term, the market now sees somewhat more chance the Fed cuts than tightens.
  • ECB President Draghi and BOJ Governor Kuroda promise stimulus if and as needed.  A Bank of Japan top advisor, Shibayana, recommends unilateral intervention to prevent excess yen volatility and says that emergency Board meetings between scheduled ones should be considered to assure policy timeliness.
  • The Bank of England is widely expected to cut its interest rate.
  • South Korea is launching a fiscal stimulus, and Bank Indonesia plans intervention to keep the rupiah from strengthening excessively.

At last night’s European Council dinner in Brussels, PM Cameron’s colleagues rejected any undoing of the Brexit decision and said that talks toward establishing a new code of rules to governing Britain’s relationship with the EU cannot begin until the Britain invokes Article 50 of the Lisbon Treaty, which would start a 2-year countdown toward completing the process.  Cameron attributed voter discontent in the U.K. to the EU’s mishandled treatment of the immigration problem.  British politics both in the Labor and Conservative parties remains totally confusing and paralyzed.  No PM with authority to act is likely before September 2 at the earliest.

Share prices in the Pacific Rim rose Wednesday by 2.3% in Japan, 2.0% in Indonesia, 1.3% in Singapore, 1.0% in Taiwan, Hong Kong and South Korea, 1.2% in New Zealand, 0.8% in Australia, and 0.7% in China.

Sovereign debt yields declined overnight across a broad swatch of countries including vulnerable members of the EU like Italy, Spain, and Greece but also in Britain, Germany, France, Switzerland and U.S. futures.  Japan’s 10-year JGB hit a record low.

West Texas Intermediate crude oil jumped 1.3% to $48.46 per barrel.  A bombing at the Istanbul airport killed around 40 people and wounded at least 150.  Gold is up 0.2% at $1,320.10 per troy ounce.

Japanese retail sales were unchanged on month in May and 1.9% below the year-earlier level.  Large-store sales fell 2.2% on year.  Japanese small business sentiment, measured by the Shoko Chukin index, recovered 0.9 points to a 2-month, albeit depressed, high of 46.5.  Such had an average score in the first quarter of 48.0.

British mortgage applications according to central bank data reached 67.04K in May, up from April and more than had been forecast.  The Nationwide index of British house price inflation accelerated to a 3-month high of 5.1% in June.  But these results were gleaned at a time of confidence that U.K. voters were going to remain in the EU.  Fitch revised projected U.K. GDP growth lower to 1.0% both in 2017 and 2018, reflecting very weak investment.

Economic sentiment in the eurozone fell 0.2 points to a 2-month low reading of 104.4 in June.  Industrial confidence, consumer confidence, and sentiment in services but especially retail were lower than in May.  The business climate index also fell to a 2-month low.

German consumer confidence, on the other hand, rose 0.3 points to a 10-month high in July of 10.1, and the UBS Swiss consumption indicator also improved 0.09 points to a reading in May of 1.35.  Interpretation of any European data collected before the Brexit verdict should be taken with a grain of salt.

For example, Austria’s June purchasing managers index in manufacturers shot up to more than a 5-year high of 54.5 from 52.0 in both April and May.  Norwegian retail sales volume increased 1.7% on month and by a better 2.0% on year in May.  Portuguese producer confidence increased a full point to 5.4, but overall economic sentiment was unchanged because of softer consumer confidence.

Six German states reported June consumer price figures showing a smaller monthly rise than in May but in five cases higher on-year comparisons.  Spanish consumer prices fell 0.8% in the year through June.

Chinese consumer confidence rebounded 1.5% in June after drops of 3.1% in May and 0.3% in April.

Australian new home sales fell by over 4.0% for a second straight month in May but had risen 8.9% in March.

Scheduled U.S. data today features personal income and spending along with the monthly PCE price deflator that Fed officials watch closely.  Pending home sales and weekly oil inventories also arrive.  Tomorrow marks the end of the first half of 2016, and Friday is Canada Day.

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

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