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Equity markets tread water as UK construction implodes in June

Equity markets have continued to push higher overnight with the S&P500 closing at a new record high, while markets in Asia were buoyed by another interest rate cut from the Reserve Bank of Australia who pushed rates down by another 25bps to a new record low of 1%.

This was the second rate cut in succession, by the Australian central bank and feeds into a global narrative of central banks looking set to embark on a new easing cycle, over concerns that the global economy is on the cusp of a sharp slowdown. These concerns over a weak inflationary outlook seem counterintuitive when looking at recent moves in commodity prices. Iron ore prices have continued their recent moves higher, now at a five year high, while oil prices are also 20% higher year to date.

Some of the recent rises in prices can be put down to concerns about supply, particularly in the case of iron ore, however recent economic data would appear to suggest that this blow out in prices may be vulnerable, if demand concerns increase, which surely they should if central banks are right in their assessment of the need for interest rate cuts.

Bond yields have also continued to trend lower, despite the more positive outlook for stocks. German 10 year yields have made a new all-time low this morning of -0.36%, while Italian 2 year yields also slipped into negative territory, despite concerns about the Italian governments disagreements over their budget with the European Commission. 

The broad thrust of the recent move higher in equity markets appears to be a more even handed approach with money going into stock markets as well as bond markets, in order to have a slightly more diversified look.

European markets have picked up where they left off yesterday, opening higher after President Trump said that new US, China trade talks had already restarted.

Investors appear to be focussing on this for now and not on this morning’s reports that the US is set to impose new tariffs on EU goods in respect of its long running dispute between Boeing and Airbus which is currently at the WTO.

Trade officials in Washington published a list of $4bn worth of EU goods to add to the $21bn worth of EU goods that were published in April.

Oil prices have eased back a touch after confirmation that OPEC had agreed to extend production cuts for another 9 months in response to concerns about future global demand. With trade tensions likely to extend well into 2020, the calculus would appear to be that lower production levels would do little to exert further upward pressure on prices.

If you happened to buy into the hype around Funding Circle when it came to market in October last year, you’d have had good reason to feel hard done by, even before this morning’s profits warning. Having already seen the shares more than halve, this morning’s downgrade to expectations for future revenue growth from 40% to 20% has seen the shares plunge even further, opening over 15% lower, and once again raising concerns over how these sorts of new issues are valued, when they are brought to market.

After hitting a three year low last month the Sirius Minerals share price has slowly been edging back higher, after the surprise announcement of the recent share placement scheme sent shares plunging. This morning’s quarterly update has seen the shares slip back slightly after management confirmed that the recent funding program was on track and that progress on the construction of the first polyhalite and commercial production is running on time, in 2021, and in line with its cost schedule, and key project milestones.

On the currencies front the pound is amongst the worst performers after a shocking miss in the latest construction PMI for June saw economic activity slide to 43.1, its weakest level since April 2009. There is no sugar-coating these numbers, they are awful. Far from seeing an improvement to 49.2, from 48.6, activity has collapsed with the home building sub component turning negative for the first time in 17 months.

It would appear that the recent stalling of house prices is seeing a slowdown in this particular sector. New orders also fell sharply as the Brexit limbo puts companies off any imminent plans to make long term investments. It also calls into question the Bank of England thinking that a rate rise is more likely than a rate cut.

If anything these numbers scream rate cut, though its questionable what any central bank can do while our politicians continue to bicker over a Brexit solution.

US markets look set to slip back a little on the open, after yesterday’s gains, though the underlying sentiment remains broadly positive.

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