Expectations of weak global growth and ever-enduring easy monetary policy, likely to be reinforced at central bank meeting this week, is seeing a mass exit from equities and feeding demand for bonds, sending yields to record lows.
Sky high demand for fixed income has sent German 10 year bund yields negative for the first time in history. ‘Fixed Income’ has taken another leap towards ‘Fixed Expenditure’. Safe haven demand in the countdown to the EU referendum is adding to demand for gilts, sending yields on the UK 10 year to fresh record lows.
General risk aversion has sent the FTSE 100 below 6000 for the first time since February with a drop in mining and banking shares contributing the most to the decline.
A report from Jefferies suggesting Barclays might be the most exposed bank to a British exit from the EU has sent shares spiralling lower on Tuesday. Barclays is thought to be most exposed through its exposure to investment and corporate banking whilst the impact on Lloyds would be though any economic slowdown because of its mortgage portfolio. Every UK-listed bank was seeing losses in excess of 1%, adding to losses from Monday in a read-across from the selling in Barclays.
The British pound slumped again on Tuesday after the Sun newspaper came out in favour of Brexit and another poll showed the ‘Leave’ camp ahead. Cable has dropped 120 pips, giving back the late bottom-fishing reprieve on Monday.
Equities continue to move in lockstep with the price of oil. A report suggesting non-OPEC supply (US shale) will grow again next year has weighed on the oil price on Tuesday. Oil’s four-day decline is symptomatic over an overall pullback from risk amid global growth concerns before the US interest rate decision.
US stocks look set for a lower open as oil prices dip and nerves kick in on the first day of the two-day meeting of the Federal Reserve ahead of the release of US retail sales data. Stocks can stabilise so long as the ratio of ‘weak growth : Fed easing’ is maintained. The market needs the Fed to reaffirm a cautious stance to rate rises to find its happy place again.
USA pre-opening levels
S&P 500: 7 points lower at 2,072
Dow Jones: 47 points lower at 17,685
Nasdaq 100: 13 points lower at 4,409
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