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AM Bulletin: Markets rise for the second day ; back to pre-referendum levels, sterling still weak
30 Jun 2016
AM Bulletin: Confidence returns – but for how long?
29 Jun 2016
AM Bulletin: The onslaught continues – and we’re not just talking the football
28 Jun 2016
Weekly Bulletin: Investors rattled by Brexit vote
27 Jun 2016
PM Bulletin: Brexit - Referendum fallout
24 Jun 2016
AM Bulletin: We’re out! And so is Cameron
24 Jun 2016
Video Update: #AskSpreadCo - EU referendum
23 Jun 2016
AM Bulletin: Markets on tenterhooks ahead of UK vote
23 Jun 2016
Spread Betting Tips
22 Jun 2016
AM Bulletin: Risk assets waft higher
22 Jun 2016
PM Bulletin:Referendum and Market Reaction
21 Jun 2016
PM Bulletin: Gold and the referendum
21 Jun 2016
AM Bulletin: Yellen testimony in focus
21 Jun 2016
PM Bulletin: Janet Yellen’s testimony
20 Jun 2016
Weekly Bulletin: It’s all about the referendum
20 Jun 2016
Market Info Update: EU Referendum Margin Changes - CFDs
17 Jun 2016
Market Info Update: EU Referendum Margin Changes - Spread Betting
17 Jun 2016
PM Bulletin: Forecasting the referendum result
17 Jun 2016
AM Bulletin: Central banks leave rates unchanged
17 Jun 2016
PM Bulletin: FOMC post-mortem
16 Jun 2016
AM Bulletin: Yen, precious metals soar post FOMC/BOJ
16 Jun 2016
PM Bulletin: FOMC look-ahead
15 Jun 2016
AM Bulletin: FOMC meeting ahead
15 Jun 2016
PM Bulletin: European equities slide
14 Jun 2016
AM Bulletin: Stocks down on oil, growth fears and UK referendum
14 Jun 2016
Weekly Bulletin: FOMC and BOJ meetings in focus
13 Jun 2016
PM Bulletin: Markets rattled by slide in bond yields
10 Jun 2016
AM Bulletin: European stock indices drift lower
10 Jun 2016
PM Bulletin: WTI at $50 – thoughts on US production
09 Jun 2016
AM Bulletin: Precious metals soar
09 Jun 2016
PM Bulletin: S&P closes in on all-time high
08 Jun 2016
AM Bulletin: Investors in limbo ahead of Fed and UK vote
08 Jun 2016
PM Bulletin: Yellen and the jobs data
07 Jun 2016
PM Bulletin: Fresh polls send sterling lower
06 Jun 2016
Weekly Bulletin: Rate hike? What rate hike?
06 Jun 2016
PM Bulletin: A dismal Non-Farm Payroll number
03 Jun 2016
AM Bulletin: Non-Farm Payroll Friday
03 Jun 2016
PM Bulletin: Non-Farm Payrolls look-ahead
02 Jun 2016
AM Bulletin: OPEC, ECB, key data releases and central bank speakers
02 Jun 2016
PM Bulletin: OPEC and the oil price
01 Jun 2016
AM Bulletin: Manufacturing PMIs in focus
01 Jun 2016
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Week Ahead: Monday 27th – Friday 1st July
 
Economic Outlook
 
  

The result is in and investors are now dealing with the aftermath. Unfortunately, the markets completely mispriced the probability of a win for the “Leave” campaign in the UK referendum. Investors decided to ignore the fact that polls were saying it was too close to call and “followed the money” instead. Punters had consistently backed “Remain” to prevail in last Thursday’s vote and as we got closer to the event that’s what the markets were pricing in. Over the course of the seven days prior to the poll the FTSE100 rallied around 7.5% while cable was up 7% over the same period. These moves suggested that there was relatively little upside left if the UK voted to stay in the EU with the potential for a significant negative move on a vote to “Leave.”

The market pricing was astonishingly asymmetric although punters had always assigned a low probability to a “Leave” vote. On Thursday morning Ladbrokes had the likelihood of a “remain” win at 75% given the amount of money wagered on the outcome. It’s fair to say that the opinion polls showed that the lead for the “Leave” campaign had completely evaporated ahead of the vote. Nevertheless, the polls were still calling the result too close to call with the added uncertainty of “undecided” potential voters standing around 10%. This time round the pollsters had it about right, while the bookies had a field day much to the chagrin of the punters.

In the early hours of Friday morning it became apparent that “Remain” hadn’t got enough support to win. By 3:00 am the grey market in the FTSE100 was down around 500 points or 8% from its high point on Thursday. Sterling also fell sharply and was down around 10% from its Thursday high by 5:00 am. Other global markets also reacted to the increasing probability of a win for Brexit. Safe-havens such as precious metals, the dollar and Japanese yen soared while the euro and crude oil slumped.

Soon after the open the FTSE began to recover and overall, the losses for sterling weren’t as bad as many (including me) predicted. The GBPUSD hit its lowest level since the mid-1980s when it briefly broke below 1.0500. But it didn’t come close to breaking 1.3000. By 9:00 am it was close to touching 1.4000 again.

But while we’ve weathered a storm there could be further market disruption to come. We now enter a period of considerable uncertainty. On Friday morning David Cameron announced his intention to resign and a new party leader should be in place in time for the Conservative Party conference in October. Later in the morning the Bank of England Governor Mark Carney said the Bank would “not hesitate to take any additional measures required” and stood ready to supply liquidity. Other central banks are also keenly watching developments.

Turning to Europe it’s possible that the UK’s exit may galvanise other countries to work together to expand membership of the Euro zone and press for a full banking and fiscal union as well. But for now it looks as if some countries are coming under pressure to hold their own referenda on continued EU membership. Certainly some political parties in Holland and France are agitating for one. Spain went to the polls on Sunday in a further attempt to form a government (they’ve been without one since December). I’m writing this before knowing the result but there’s a suggestion that the anti-austerity Podemos party could do well.

Further down the line, in October Hungary holds a referendum on refugee quotas and Italy has one on constitutional reform. This is a particular danger for Italian premier Matteo Renzi. Then, there are elections in Holland next March, in France in April/May and Germany in October. Closer to home, there’s talk of a second referendum on Scottish independence.

Turning to central bank monetary policy, last week Federal Reserve Chair Janet Yellen delivered her bi-annual Humphrey Hawkins testimony in Washington DC. In this she added little to the FOMC statement from the week before. Dr Yellen noted that economic growth has been “uneven” lately, and that payroll employment gains stepped down in April and May. Nonetheless, she remains “optimistic that we will see further improvements in the labour market and the economy more broadly over the next few years”.

Dr Yellen was at pains to reject the notion that the Fed has a "third pillar" of policy to keep stock market prices afloat. This followed a question from a member of Congress who asked if the US central bank's monetary policy was tied to boosting Wall Street's equity values. Dr Yellen insisted that it would be inappropriate for the Fed to target stock prices.

Separately Dr Yellen said that she believes the Federal Reserve has the legal authority to charge negative rates, but that this approach would likely be very low on the list of options in the event of a downturn.

One thing is for certain, last week’s referendum result makes it more likely that we see further monetary stimulus from central banks before we see Fed rate hikes.


This week’s major economic releases include:
  

Sunday - Spanish Parliamentary Elections


Monday - EUR German Retail Sales, German Import Prices, Euro zone M3 Money Supply; USD Goods Trade Balance, Flash Services PMI, Bank Stress Test Results

Tuesday - GBP CBI Realised Sales; USD final GDP, Final GDP Price Index, S&P/CS Composite-20 HPI, CB Consumer Confidence, Richmond Manufacturing Index

Wednesday - JPY Retail Sales; CHF UBS Consumption Indicator; EUR Italian Bank Holiday, GfK German Consumer Climate, German Prelim CPI, Spanish Flash CPI; GBP Net Lending to Individuals, M4 Money Supply, Mortgage Approvals; USD Core PCE Price Index, Personal Spending, Personal Income, Pending Home Sales, Crude Oil Inventories, Bank Stress Test Results


Thursday - JPY Prelim Industrial Production, Housing Starts; EUR French Prelim CPI, German Unemployment Change, Euro zone CPI Flash Estimate, ECB Monetary Policy Meeting Accounts; GBP Current Account, Final GDP; CAD GDP; USD Unemployment Claims, Chicago PMI

Friday - JPY Household Spending, Tokyo Core CPI, Unemployment Rate, Tankan Manufacturing Index, Tankan Non-Manufacturing Index; CNY Manufacturing PMI, Non-Manufacturing PMI, Caixin Manufacturing PMI; CHF Retail Sales; EUR Spanish, Italian, French, German and Euro zone Manufacturing PMIs, Euro zone Unemployment Rate; GBP Manufacturing PMI; USD ISM Manufacturing PMI, Construction Spending, Total Vehicle Sales.
  

Equities Outlook 
 

So what has the result meant for the major indices and individuals stocks? Well global indices began to sell off soon after the polls closed on Thursday night. Bear in mind that they had all been rallying hard ahead of the referendum so were due a profit-taking pull-back. But pretty quickly it became apparent that support was lower than predicted for the “Remain” side. Asian Pacific stocks together with European and US indices on the grey market turned sharply lower. Ahead of the open the FTSE100 had dropped around 10% from its Thursday night high.

But it was the European indices which really suffered. By the close on Friday the FTSE100 had recovered significantly to close around 2% lower. But the Spanish Ibex and Italian MIB lost around 11% each. Even the heavyweights – the German Dax and French CAC - were both down around 6% over the course of the session. Of course, the FTSE100 is packed full of multinationals that derive a significant proportion of their revenues and earnings from countries outside the EU. Companies such as AstraZeneca, GlaxoSmithKline, Shire, BP and Rolls-Royce were all trading in positive territory by Friday’s close.

As far as the losers were concerned, it was as expected. The UK’s banking, insurance and property sectors were very badly hit with some losing as much as 25% of their value in early trade.

Commodity/ FX Outlook

Oil 

First thing on Friday morning, crude oil was down around 4%. This was a straightforward risk-off move following the UK’s vote to leave the EU. However, investors were also taking the view that economic growth was likely to take a hit as the UK and EU renegotiated trading agreements. The US dollar rallied sharply overnight as investors rushed for the safe-haven of the greenback and this put additional pressure on oil.

However, it’s worth noting that neither WTI nor Brent broke below the lows hit just over a week ago when the “Leave” campaign had a substantial lead in the polls. Consequently, crude has simply done a round-trip and is now back where it started. Given this, and also considering that the financial markets are so far responding to the surprise result with remarkable calm, it shouldn’t be long before traders once again focus on supply/demand fundamentals.

Earlier this month Brent and WTI both broke above $50 per barrel. As noted in earlier commentaries, $50 is more a psychological level than a technical one. Nevertheless, the area around here acted as resistance at the end of May and beginning of June for both contracts.

At the beginning of the year crude, as with other commodities, looked overdue a corrective bounce following a protracted sell-off. That’s with the benefit of hindsight, of course. When Brent and WTI broke below $30 earlier this year there were still a number of respected analysts who had a $10 price target on crude. But bounce it did. Traders anticipated supply and demand coming back into balance sooner than many oil forecasters predicted. At the same time the dollar began to pull back from its lofty heights while OPEC and non-OPEC producers held up the prospect of an output freeze. That never came to pass of course. Despite this, crude effectively doubled in price between early this year and the beginning of June.

But ahead of the referendum oil prices were also being influenced by “risk on/risk off” trades. The sell-off from 9th-16th June corresponded to a poll lead for the “Leave” campaign while the rally which followed ahead of the referendum came on the back of a recovery for “Remain.” In between there has been some volatility as traders react to US inventory data.

Oil should now go back to trading on fundamentals. US inventory data should continue to cause some short-term rallies and sell-offs as it still offers a mixed outlook. At the same time, it’s probably too early to hail the re-emergence of US shale oil, despite a small uptick in the rig count from Baker Hughes. Given the generally bullish attitude of those working in the oil industry, we could see more rigs come out of mothballs if crude shows signs of consolidating around $50. However, as noted before some analysts believe that US shale oil producers need to see an oil price on its way to $60 or even $70 before they would resume drilling.

There are also concerns over the outlook for global growth. These fears have been exacerbated by last week’s referendum result. Investors remain fearful of the prospect of a deflationary/low growth economic environment for years to come.

 

Gold/silver
 

At the end of last week precious metals soared following the unexpected victory for the “Leave” campaign in the UK referendum. This was despite a big rally in the US dollar which is typically inversely correlated to moves in dollar-denominated commodities.  Gold flew above $1,350 to hit its highest level in over two years. Silver soared above $18 per ounce and traded at its best levels since January 2015. However, both metals then pulled back from their highs. It could be that they will come off further if equities and other markets show signs of stabilising. However, it’s still early days. It’s worth remembering that the UK’s decision will put considerable strain on the European Union. The referendum decision also makes it much more likely that central banks will keep monetary policy loose for longer.

In this regard on Friday morning Bank of England Governor Mark Carney said the Bank would “not hesitate to take any additional measures required”. Other central banks are also keenly watching developments. This raises the possibility of additional monetary stimulus from both the European Central Bank and the Bank of Japan. Not only that, but it also reduces the likelihood that the US Federal Reserve will hike rates this year. The prospect of lower interest rates for longer is positive for gold and silver as both are attractive assets to hold in a low interest rate world. This is because the lost-opportunity cost of owning gold or silver is reduced when other assets yield nothing – or have negative yields as is currently the case with $10-11 trillion of government debt worldwide. The outlook for global economic growth remains uncertain and the bond market is pricing in the possibility of low inflation for many years to come.

 
Forex 
 

There were some dramatic currency moves in the run-up to the UK referendum– particularly in sterling. Cable (GBPUSD) was trading just above 1.4000 one week before the vote. Yet as the polls closed, cable topped 1.5000 for a weekly gain just shy of 7%. Sterling subsequently collapsed as it became apparent that the “Leave” vote was coming in better than expected on a strong turnout. As the Asian Pacific session ended cable was trading close to 1.3200 for a high-low move of 12% in under six hours. This was the lowest level seen on the GBPUSD since the mid-1980s.

Despite this, there was no “flash crash” and business was getting done. In fact, in some respects it didn’t seem such a bad result given that some analysts had predicted that cable could break below 1.2000 on a Brexit vote. Then we had a bounce which took the GBPUSD to within 0.2 cents of 1.4000 soon after the open of the London exchanges.

But sterling wasn’t the only big mover on Friday. The US dollar was the biggest beneficiary of the “safe haven” play. The Dollar Index hit its highest level since March this year while the EURUSD fell towards 1.0900 but then recovered. But the other big “safe haven” in FX terms is the Japanese yen which soared as the results came in. The USDJPY crashed through 100.00 to hit a low just under 99.00. The yen subsequently fell back since and the USDJPY was trading around 102.00 as London closed on Friday.


 
Disclaimer:
​    

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin Weekly

Category: Weekly Bulletin


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