Brexit continues to dominate as markets readjust...
Week Commencing Monday 4th July 2016
Overriding Market Themes
Bank of England Governor Mark Carney said on Thursday the central bank would probably need to pump more stimulus into the UK's economy over the summer after the shock decision by voters to leave the European Union. The pound tumbled and shares soared on Mark Carney’s hints that official borrowing costs could be cut further from their record low of 0.5 percent, potentially as soon as July. The prospect of official interest rates being pushed down to zero also knocked the yields on UK gilts to record lows. Indeed, the first negative yielding bond appeared following Carney’s speech with a gilt maturing in March 2018 trading at -0.003 percent. Interest rates have been at 0.5 percent for more than seven years after they were slashed during the UK’s downturn and the global financial crisis. Before the referendum, economists were forecasting that in the event of a vote to stay, the next move in official interest rates would be up. Carney stepped in almost immediately after the referendum result became clear last week and sought to calm financial market fears about the impact of the Brexit vote by insisting that the bank would take any measures needed to secure economic and financial stability.
Interestingly, politically things seem to be even worse than financially at the moment, if that is even possible! Jostling for poll position for the Conservative party leadership, Tory contender Stephen Crabb has pledged to create a GBP 100 billion “Growing Britain Fund" if elected. Each candidate is busy setting out their agenda, with all but one stating that they will delay triggering Article 50 until a British negotiating position is found. So far, Theresa May appears to be the frontrunner with the support of over 100 Conservative Party MP’s and according to a recent poll, the majority of conservative voters. She is running on a platform promising to reconcile the Remain and Leave sides and “govern for the whole country”. Meanwhile the Labour party continues to head towards oblivion, with Jeremy Corbyn and other party officials remaining at loggerheads. There is speculation that a further continuation of the crisis will likely split the party in two, with the moderate lefts creating their own party to take on Corbyn’s ultra-left Labour.
In more UK news, Sterling fell to a 31 year low against the US Dollar on Monday on anxiety over the aftermath of the UK's decision to quit the European Union, with analysts anticipating an even steeper drop in coming months. In addition, a fresh move for Scottish secession, and the response of the EU and its ability to contain calls by anti-EU parties across the continent, will combined to make matters worse for Sterling in the future. Financial institutions have markedly reduced their Sterling estimates for the year, with some now looking at GBP/USD trading at 1.20 by year end.
GBP This Week
Following the UK’s vote to leave the EU, we expect further losses against the US Dollar, however more limited losses against the Euro (especially given the complication of a BREXIT on European political stability). Given the importance of this to global markets, it is unlikely the UK data will impact markets in the short term, instead the markets are likely to concentrate on three specific areas. Firstly, the likely successor to David Cameron and the continued instability within the Labour party. Secondly, when Article 50 will be triggered. Lastly, any additional monetary policy measures deployed by the Bank of England.
USD This Week
Non-farm payrolls are the main event of the week, with market expectation set to see a increase of 175,000 for the headline. We expect the unemployment rate to remain the same at 4.7 percent while hourly earnings are expected to rise by 0.2 percent on the month. Communications from the Fed will also be monitored and any statement regarding the implications of the UK referendum will be studied closely. With this in mind, we expect the greenback to trade within the range, however with a upside bias.
EUR This Week
The Euro has shown surprising resilience in the wake of the Brexit vote, with EUR/USD continuing to trade above 1.10. This however is unlikely to continue as markets start focusing on the increased probability of EU disintegration. Again, as with Sterling it is unlikely the the single currency will move on the back of data releases this week. With this in mind we would advocate taking stock of the current political situation to give a view of EUR market movement.