Sterling and European Stocks Extend Slide

June 27, 2016

European markets staggered further from all the political and economic uncertainties unleashed by the Brexit referendum result last week.  Britain has a political vacuum.  PM Cameron speaks to parliament today.  He’s resigned by wants to stay until a Tory successor is chosen at the Conservative annual conference in October.  Markets do not seem to be allowing that much delay.  In the Labour Party, Corbyn is under tremendous pressure to resign as well.  There is doubt that central banks can provide sufficient liquidity and secure any semblance of financial market stability.  Many in Northern Ireland and Scotland want to sever ties with England and move more politically into the EU fold.  A whole different fear is that key pieces of continental Europe like common market founders France and The Netherlands will take nationalist moves and follow Britain’s lead, breaking up the EU altogether.  A petition to hold a second U.K. referendum has over 3 million signatures.  British Chancellor of the Exchequer Osborne stressed that only the U.K. can activate Article 50 of the EU Treaty, which would begin the countdown to its exit, and said that the next government will not do that until the new arrangements are much better understood.  The rest of the EU wants this done very soon.

In the markets,

  • The dollar advanced another 3.6% against sterling, sailing past its Friday high all the way to an intra-day peak of $1.3187.
  • The dollar rose 0.9% against the kiwi, 0.8% relative to the Australian dollar, and 0.9% versus the euro, touching $1.0983 at one point.
  • The dollar was not the strongest safe haven, however.  That’s been the yen, which Japan can ill-afford if another recession is to be avoided.  The yen climbed 0.7% against the dollar, peaking at 101.47, and 1.6% relative to the euro.  The Swiss franc also has outpaced the the dollar with a 0.5% rise against such.
  • China has harshly criticized British irresponsibly reckless behavior.  The yuan was fixed 0.9% lower by the central bank there at 6.6375 and got as weak as 6.6473, a near 6-year low.
  • Gold continued to surge, rising 0.7% on net and to as high as $1,335.40 per troy ounce.
  • West Texas Intermediate crude oil dropped 0.5% to $47.42 per barrel.
  • The British Ftse has lost another 1.3% so far today.  Like Friday, this was smaller than several European continental bourses especially ones with debt vulnerability like Greece (-5.0%) but also in the Nordics where drops of 5.8%, 1.8% and 6.3% happened in Finland, Denmark, and Sweden.  Even the German Dax (-1.5%) has lost more than the Ftse.  Stocks are down 2.5% in Belgium, 1.5% in France and Italy, and 1.0% in Russia.
  • Asian share prices had earlier staged a rebound.  The Nikkei rose 2.4% despite the yen’s more overvalued level, and the Chinese Shanghai Composite index rose 1.5%.
  • Lower sovereign debt yields reflect elevated fears of recession and the belief that central banks like the Bank of England may be cutting interest rates.  In the U.K. case, it has to be seen if rising inflation on sterling weakness permits this.  10-year yields are down by 13 basis points to 0.96% in the U.K. and have fallen 16 bps in Span and by Germany and France.  The Japanese JGB dipped 2 bps to -0.20%, and its U.S. counterpart in futures trading slumped 9 bps to 1.47% at latest look.

Not much data have been reported on this final Monday of the first half of 2016.

M3 in the eurozone expanded 4.9% in the year to May, but the 3-month pace dipped to 4.8% from 4.9% the month before.  Slower M1 growth of 9.1% occurred.  Lending to households and to non-financial firms increased by 1.4% and 1.6% in the year to May.

Growth in Chinese industrial profits slowed further to 3.7% in May and was well below the 6.4% on-year increase over the first five months of 2016.

Real German construction orders sank 0.8% in April from March.

Finnish producer price deflation subsided to -4.0% in May from -4.7% in April.

The Bank of Israel is holding its monthly monetary policy meeting.

The ECB is sponsoring a 3-day central bank symposium in Portugal.  Fed Chair Yellen is attending.

The Dallas Fed manufacturing index and Markit Economics’ U.S. services PMI findings will be reported.

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

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