Stock and forex markets recovered off their lows and gold was sold off after news broke that a British MP had been killed and each side of the Brexit argument had suspended their campaign.
That saw the S&P 500 finish up 6 points at 2077. That recovery has helped the SPI 200 rally with the September contract up 35 points, suggesting a positive start to the day.
On forex markets, USDJPY collapsed to 103.55 after the BoJ left policy on hold yesterday. It’s back at 104.33 this morning. Likewise, other currencies like the pound, euro, Aussie dollar and Kiwi also came under pressure before recovering. The Aussie sits at 0.7364 this morning.
On commodities, crude oil collapsed as the uptrend in WTI gave way. It was down around 4% in both US and Brent terms. Gold surged at one point to $1313 before reversing to sit at $1279 this morning.
Here’s the scoreboard (8.12am):
- Dow: 17733 +92 (+0.53%)
- S&P 500: 2078 +6 (+0.31%)
- SPI200 Futures (September): 5,109, +35 (0.7%)
- AUDUSD: 0.7363 -0.0040 (-0.54%)
Now, the Top Stories
1. Brexit Watch – markets recover after campaigns suspended. Campaigning has been suspended for the Remain and Leave sides in the UK after Labour Party MP Jo Cox was killed overnight while campaigning near Leeds. That suspension of the campaign has been given the credit for the recovery in markets last night.
That recovery was in pretty much everything except oil last night. GBP traded down near 1.40, USDJPY was around 103.55, gold was at $1315, the Aussie in the low 73s, the S&P 500 was down at 2050. Each of these markets closed New York trade with a sharp reversal. Alan Ruskin, global co-head of FX research at Deutsche Bank in New York, told Reuters “certainly, people are talking about the possibility that this does influence the Brexit vote in favor of remain. It is a tragic event all around. There is a sense, there is an immediate emotional reaction, but there is still a week before the referendum itself.”
The recovery is just another example of how markets carry on regardless – sometimes hysterical, not often sentimental. But what last night’s moves – savage selloff and then recovery – communicate is that the market is very thin, illiquid and whippy. Something for traders to remember for next week as the vote gets closer.
Something else for traders to focus on is news that a new Brexit poll which shows the Leave campaign has surged to a 6-POINT LEAD. That’s the first time this poll has been in front since the referendum was announced.
While we are on Brexit – it’s not just about the UK. Brexit could devastate Germany. If you are wondering why markets broadly, not just the pound, gilts or the FTSE 100, are in such a funk over Brexit it is because traders and investors are worried about the wider implications of the vote.
Europe, especially Germany, is not just the UK’s partner in the EU but their customer, supplier and so on. They are intertwined. Will Martin reports that according to new analysis from the highly respected Ifo Institute for Economic Research, a German research house, the “biggest risk” facing the German economy right now is Brexit, and Germany has an “awful lot to lose” in the event that Britain does exit the EU.
The Ifo Institute also argues that in the long-term as much as 3% could be shaved off the country’s growth thanks to Brexit. Only time will tell if this prediction is true. But that’s the point of the market ructions. Irreducible uncertainty from a vote too close to call is freaking people out.
3. The Australian dollar is hanging tough against the USD but it has collapsed to 4-year lows against the yen. My sense is that the Bank of Japan is really caught in a bind. It tried negative rates earlier this year to help the economy and weaken the yen. But that backfired by scaring the heck out of Japan’s mega army of savers and suggesting to forex traders the BoJ was out of ammunition. So they promptly sold the USDJPY buying yen.
That’s a handbrake on two things the BoJ wants – growth, and inflation. Yesterday the BoJ took might seem the reasonable step of leaving its monetary policy settings where they were at its board meeting. But again traders saw that as another sign the BoJ has nothing – including the ability to intervene to sell yen.
So they sold USDJPY to an overnight low around 103.5 which was the lowest level since August 2014. As David Scutt reported, that yen strength, and the dip in AUDUSD that accompanied it meant the AUDJPY exchange rate got annihilated and fell to the lowest level since May 2012. In an ominous sign for the BOJ – and potential Toyota and Mitsubishi new car purchasers – the clear down trend remains in force.
4. The ASX collapsed into the close for the second day running as Asian markets sold off yesterday – why should today be any different? The good news for the local market as we head toward the open is that the September futures are up 35 points at 5109. But whether or not the overnight price action will be mirrored by the end of the day is an interesting question.
With crude down, Santos and Woodside look vulnerable again (Santos has broken a big uptrend this week). Gold has reversed smartly from last night’s highs which could sap some of the recent strength from that sector’s miners, and the banks remain, well, just under pressure.
And of course, it’s Friday. Not any Friday mind, but the one before the biggest event in financial markets for years. Maybe decades. So the question is whether the early strength the SPI points to can hold into the close. The last two days suggest sentiment might be a little fragile for that to be so.
5. The long bond rally suggests the US and global economy is weak, but this guy says it’s just about the pound and Brexit fear. Bob Bryna reports this morning that Paul Mortimer-Lee, chief North America economist at BNP-Paribas, said that the bond market is not painting a pretty picture for the economy right now. Mortimer-Lee says that while there is some impact of short term concerns, like the UK EU membership referendum, he argues that “signs of US economic weakness are behind the shift in bond yields, aided and abetted by the failure of the Chinese economy to respond significantly in the upside following major stimulus”.
But Roger Bridges, Nikko Asset Management’s Global Rates & Currencies Strategist, says the bond rally has been mapping the moves, positive and negative, of the British pound and poll result since late 2015. And he has a great chart to prove it. I’ve got more here.
Oh, and BNP Paribas says buy the 10-year treasury!
6.The world’s biggest and best hedge fund manager says the Fed is partying like it’s 1929. Or, to put it another way, sleepwalking into disaster. The clear takeaway from this week’s FOMC meeting is that the Fed still wants to raise rates but just isn’t sure when it will get the chance.
Akin Oyedele reports that Ray Dalio, the founder of hedge fund Bridgewater Associates, wrote recently that the economy today is eerily similar to 1937. Back then the Fed raised rates eight years after the 1929 financial crisis, following accommodative monetary policy to boost the economy. But, as we all know, that proved to be too soon.
He says central bankers’ ability to influence their economies with monetary policy is “near the end” of its efficacy. As a result, because the “dollar is the world’s reserve currency and that the world needs easier rather than tighter money policies, then one would hope that the Fed will be very cautious about tightening”.
Speaking of that period of economic history, Bob Bryan reports the Morgan Stanley global strategy team of Chetan Ahya, Elga Bartsch, and Jonathan Ashworth are pretty much warning along similar lines.
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: GDP, s.a., q/q, %, Q1: 0.7 vs. 0.5 exp.
AU: Consumer infl. expectations, Jun: 3.5 vs. 3.2 prev.
AU: Employment change (k), May: 17.9 vs. 15 exp.
AU: Employment rate, May: 5.7 vs. 5.7 exp.
JP: BoJ policy rate: -0.1 vs. -0.1 exp.
UK: Retail sales ex auto fuel m/m, %, May: 1.0 vs. 0.3 exp.
UK: Bank of England rate, Jun-16: 0.5 vs. 0.5 exp.
US: Curr. account balance (US$,b), Q1: -125 vs. -125 exp.
US: Phil. Fed business outlook, Jun: 4.7 vs. 1.0 exp.
US: Core CPI y/y, %, May: 2.2 vs. 2.2 exp.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
a2milk (A2M: ASX)
a2Milk was one of the stock market’s stars this week. The share price rose 14% on Wednesday after the company upgraded guidance for the current financial year. It now expects its EBITDA earnings measure to be in the range of $52-54m.
The market also took comfort from another assurance by management that it considers the company well placed to respond to the recent raft of regulatory changes surrounding the sale of infant formula in China.
For good measure, a2 will also be admitted to the ASX200 index from next Monday.
Through all the volatility, the stock’s chart is beginning to take some pattern shape. In the big picture, it looks like a large, downward sloping trend channel. This holds the promise of a return to the major channel resistance around $2.10. A break above the immediate resistance formed by Wednesday’s high would look encouraging. However, if the share price backs off this resistance, the bottom of this week’s price gap around $1.51 now forms support.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC