The fallout from Brexit has sparked an interesting and, for many, unexpected catalyst – expectations of more easing from central banks across the globe and no fear of a Fed hike from traders for years. So markets are having another QE rally.
That’s driven UK and European stocks higher and driven the SPI 200 futures up another 73 points, 1.4%, to 5166.
The question for local traders though is whether, on this last day of the financial year and with an election on Saturday, they want to play catch up with futures and US markets or, like the last couple of trading days, the physical market underperforms.
Elsewhere overnight, copper is again making fresh two-month highs, the Aussie dollar is in the mid-74 cents region, crude is back above $50 in Brent terms and gold is hanging tough.
Here’s the scoreboard (8.03am):
- Dow: 17694 +285 (+1.64%)
- S&P 500: 2071 +35 (+1.7%)
- SPI200 Futures (September): 5,166, +73 (+1.4%)
- AUDUSD: 0.7447 +0.0074 (+0.89%)
Now, the Top Stories
1. Here’s a simple explanation of why almost everything had a good day over the past 24 hours. I was in my daily interview on Sky Business a little after 7am and host Carrington Clarke noted that when you look around the grounds of global markets almost everything rallied. Stocks, bonds in Europe (but not the USA), the British pound and other forex rates, crude oil, copper, credit, and gold. Carrington asked me how I squared that circle.
It’s an interesting question because if crude and stocks are up then surely gold should be lower as the fear trade washed out. And how could German bonds have rallied further below zero but the DAX and Aussie dollar end the session stronger? And if all of that is happening then why couldn’t sterling hold above 1.35 last night.
My explanation is simple. It looks to me very much like the thread pulling the moves together is that traders at a macro level are now betting on continued uncertainty about the UK and global economy, not to mention US, will forestall any increase in Fed rates and bias the rest of the global central banking family back towards easing.
So this is a QE style rally which might hit a savage headwind if the data does actually print the way gold and forex traders seem to be betting it might. It also might explain why ASX buyers have been more hesitant than their offshore counterparts in the last couple of days.
2. Credit Suisse’s reasons for slashing its USDJPY, EURUSD, and GBPUSD forecasts is a great example of what these as yet unfelt economic impacts might be. Credit Suisse released its latest FX Compass on Wednesday night with the interesting title of “Oh Dear!”. In it they completely collapsed their expectations for the levels of the pound and euro and materially upgraded their expectations for Japanese yen strength.
The reason they did this, they said, was:
As a function of the UK’s “Leave” decision at the June 23 Brexit referendum, our economists have materially downgraded their expectations for the UK and European economies vis-à-vis the rest of the world. In the same context, we are making material revisions to our FX forecast set.
These are big downgrades and part of why Marc Chandler in item 5 below is warning not to get too caught up in the markets bounce.
3. Part of the stock rally overnight was also because central banks really have got this. I know this is a bit of a theme of mine since Brexit last Friday but I really believe that the fact the wheels have stayed on funding markets, and liquidity has not been questioned, is the very reason the FTSE and other markets have been able to bounce back while other markets like forex (the pound and USDJPY in particular) and gold still reflect stress and uncertainty.
As if to underscore the point that central banks are all over this, Mark Carney, governor of the Bank of England, called in the heads of the big British banks for a fireside chat. Via the FT Will Martin reports that a “person briefed on the meeting” said the chief executives of HSBC, Barclays, Lloyds, RBS, and Standard Chartered, along with representatives from Nationwide, TSB, and others, were given reassurances about the amount of liquidity in the financial system.
Carney encouraged the bankers to keep the doors open and lending to consumers and businesses to avoid a GFC style credit crunch. What’s not said in the FT or by Will is something I’m betting did happen. That is, Carney would have made plain the quid pro quo for central bank, and governmental support, for the banks and the UK financial system is that the banks need to do their darndest to keep the economy as strong as possible. There’s every chance he was very firm in that “encouragement”.
4. And on cue, the Fed has cleared 31 of 33 big US banks in its latest stress test. There is no more obvious place to show the difference between the pre-GFC banking environment and what we have now than the handcuffs the Fed has on the banks it regulates in the US. As background in response to the financial crisis the Fed restricted the dividend payments and share buybacks of the big banks which forced them to build more capital to hold on their balance sheet. It did this as part of a plan to make the sector more resilient to shocks.
So news this morning that after the final results of the Fed’s 2016 stress test, it has allowed 31 or the 33 banks it looked at, in terms of risk management processes, to increase dividends and undertake buybacks.
The stress tests did not include Brexit but the fact that they did include the risk of big recessions in the US, Europe and the UK should cheer investors that the individual banks and the banking system more broadly are in good health.
The Wall Street Journal has more here.
5. Don’t get caught up in the bounce – it won’t last, these analysts say. One of my favourite, and one of the best, market strategists for the last decade or more has been Marc Chandler at Brown Brothers Harriman in the US. Chandler has an ability to get in the helicopter and survey the battlefield, not the skirmish in his near vicinity. And because he is a forex guy, the list of skirmishes he has has to watch in order to draw his conclusions about the global economy and markets is broad. So he has a good feel for what is going on, what drives it, and what might happen.
That’s by way of background to a note of his I read this morning which was headlined “The Worst is Yet to Come–Don’t be Seduced by the Price Action“. He says the recovery has been driven by momentum traders squaring up their shorts and that “it is important to recognize the high degree of uncertainty. This will likely keep many institutional portfolio managers on the sidelines. They do not have to be in a hurry.” So with a holiday for the 4th of July on Monday and then non-farm payrolls next Friday, now that the bounce has come, there is little fresh reason for these big investors to take any new positions for more than a week. So the rally could fade.
Likewise the technical trading strategists at UBS put out a note saying the bounce won’t last. Importantly they did this BEFORE the bounce. Michael Riesner and Marc Muller said they expected a bounce which will then fade and the S&P 500 will then fall towards 1960 and 1928. Naturally if they are right that will drag the ASX 200 lower as well. I have more here.
6. There are 11.7 trillion in bonds with negative rates. The volume of bonds that are paying a rate below zero per cent has grown by $1.3 trillion dollars to an incredible $11.7 trillion in the wake of Brexit, Bob Bryan reports. Robert Grossman, head of macro credit at Fitch Ratings says: “Brexit-related concerns drove more long-dated bond yields negative, with particularly big shifts in German, French and Japanese yield curves during June.”
Japanese debt, JGBs, makes up about two thirds of this total with Germany and France now having more than $1 trillion in sovereign debt below zero, Grossman said.
Negative yields is a problem for the global economy. Not just because it screams uncertainty and week growth but also because “the increasing amount of long-term negative-yielding debt underscores the challenges faced by large bond investors such as insurance companies that need to match long-term liabilities with similar maturity assets”, Grossman said. Naturally the low return environment is also a challenge for self funded retirees here in Australia as well.
Low rates and QE were supposed to induce animal spirits and investment. Instead they’ve done the opposite because of the reason Grossman outlines. Let’s hope the RBA can find reasons to resist the need to cut rates again in Australia.
Key data for the past 24 hours (with thanks to BNZ markets)
JP: Retail trade (y/y%), May: -1.9 vs. -1.6
GE: GfK consumer confidence, Jul: 10.1 vs. 9.8 exp.
EC: Consumer confidence, Jun: 104.4 vs. 104.7 exp.
GE: CPI (y/y%), Jun P: 0.3 vs. 0.3 exp.
US: Personal income (m/m%), May: 0.2 vs. 0.3 exp.
US: Personal spending (m/m%), May: 0.4 vs. 0.4 exp.
US: Core PCE deflator (y/y%), May: 1.6 vs. 1.6 exp.
US: Pending home sales (m/m%), May: -3.7 vs. -1.1 exp.
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And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Barclay’s is one of the UK banks with the biggest Brexit exposure so I thought I might feature a UK stock today.
Analysts believe that the loss of European “passport” rights which allow banks in one member nation to provide services in other nations will knock Barclay’s profits heavily. It has a large exposure to investment banking. Brexit will force it to increase staff and costs in Frankfurt or Dublin to trade European securities and provide services to European corporates. It’s also exposed to a slowdown in the UK economy.
At its low on Friday, Brexit had wiped 35% off Barclay’s share price. It’s since recovered 14%
Barclay’s chart is also interestingly placed. Because it’s so much in the Brexit firing line, it will be an interesting stock to follow. It could be a litmus test for underlying market concern over Brexit.
If Barclay’s can rally convincingly off Monday’s low it will confirm a triangle pattern. Although it is 14% above the low, such is the recent volatility that it’s still trading inside Monday’s range. That means the triangle scenario is by no means a certainty at this stage. Downward momentum on the stochastic indicator on the longer term weekly chart below still looks pretty robust so some more upside is needed to confirm the triangle.
However, if we do get a triangle, the text book calls for Barclays to recover the resistance line around £250 from the current price of £138 before ultimately falling away to new lows. Plenty of volatility ahead!
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC