Sterling at Post-Brexit Low but Share Prices Climb

October 4, 2016

Britain’s plans to leave the EU has returned to center stage. Prime Minister Theresa May will address the Tory annual conference tomorrow, but she has already indicated a predisposition for no sugar-coating of the coming change in Britain’s relationship with the European Union. Access to the single market will be constrained, and the all-important financial services sector will not get special protection.

Sterling touched an overnight low of $1.2740, weakest since the mid-1980s and down 15% since June 23 when the Brexit referendum was approved. The silver lining to Brexit is the sharp slide in sterling that figures to trim the U.K. trade deficit. Already a number of economic indicators have highlighted a surprising resilience of the economy after the initial hit delivered by the referendum’s result. Today’s latest such evidence comes from the British construction purchasing managers report, whose index advanced 3.1 points to a six-month high of 52.3 in September. Such bottomed at 45.9 in July.

Global share prices have also been buoyed by lessening worries about contagion from Deutsche Bank’s difficulties. Equities rose 0.8% in Japan, 0.6% in Hong Kong, South Korea, and Taiwan and 0.5% in Singapore. A 1.7% advance in the British Ftse leads today’s rally in European stocks including gains so far of 0.8% in the Paris Cac and 0.4% in the German Dax.

West Texas Intermediate crude oil fell 0.8% but is still trading just $1.56 south of the psychological $50 level. Comex gold is little changed at $1,312 per ounce.

The dollar is 0.8% stronger against sterling, unchanged versus the yen and Swiss franc, 0.3% softer relative to the loonie, 0.2% lower against the Aussie dollar and up 0.1% vis-a-vis the euro and kiwi.

China’s market remains closed for the National Holiday and will stay shut all week.

The ten-year German bund and British gilt yields are a basis point lower. Japan’s comparable JGB yield is steady at negative 0.08%.

Two central banks announced monetary policy decisions.

  • The Reserve Bank of India sprung a surprise on the market, lowering its repo rate by 25 basis points to 6.25%. That was the second cut of 2016 and comes six months after the earlier move. 125 basis points of easing was implemented in 2015.
  • The Reserve Bank of Australia’s Official Cash Rate was left at a record low of 1.50%. There were reductions of 25 basis points each in May and August of this year, bringing the cumulative decrease since November 2011 to three percentage points.

Producer prices in the euro area slipped 0.2% on month in August but posted a smaller 12-month 2.1% rate of decline.

Japanese consumer confidence improved a whole point to 43.0 in September, best since September 2013 and 2.9 points above this year’s low reached back in February.

In spite of progressive easing in BOJ policy, on-year growth in the Japanese monetary base slowed to 22.7% in September from 24.2% in August and to 23.8% in the third quarter from 25.9% in 2Q, 28.8% in 1Q, 34.0% in full-2015, and 43.2% in 2014.

Building permits in Australia, which had leaped 12% in July, slipped by a smaller-than-expected 1.8% in August to produce a 10.1% 12-month rate of increase.

South Korea’s current account surplus narrowed 36.4% on month to $5.5 billion in August.

Romanian producer prices fell 1.9% in the year to August, and New Zealand house prices increased 14.3% in the year to September.

Scheduled U.S. data releases today are the NAPM index, a PMI for the New York area, and the IBD/TIPP Optimism index.

A Vice Presidential U.S. debate will be held tonight. The results of post Trump-Clinton debate polls are trickling in, and they suggest a widening lead for Clinton. The popular vote spread is still mid-single digits. The electoral vote margin appears wider. The more sanguine mood in financial markets may also reflect greater confidence that Trump will not be the next president, but such thinking has to be viewed as guarded and vulnerable to future political news.

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

Tags: , ,


Comments are closed.