Europe

It’s been a welcome respite for European equity markets today as investors start to absorb the impact of last week’s seismic miscalculation on the part of investors to the UK EU referendum outcome, and shrug off the double downgrade of the UK economy by ratings agencies Standard and Poor’s and Fitch.

It is slowly becoming clear that despite the slow political reaction to recent unexpected events that nothing is going to happen in the short term. Concerns remain around UK company access to the single market, and there is an element of repricing risk going on in that regard, but for now it appears markets are starting to settle into their new equilibrium.

Amongst the best performers financials have led the rebound with all FTSE sectors posting gains. UK banks, which had seen declines of between 25%-30% in the past few days have seen nice bounces as investors realise that this is not in any way a “Lehman” moment for them, even if concerns remain with respect to the financial health of Italian banks.

The Italian market is outperforming on speculation that Italian banks might see some form of capital injection to mitigate some of the financial stress the banking system is under and has helped boost the FTSEMib by over 3.5%.

On the downside we’ve seen gold miners decline led by Fresnillo and Randgold Resources.

The FTSE250 has also rebounded strongly helped by a rebound in house builders and retail stocks, and looks on the way to reversing about a quarter of the losses seen in the past day or so, helped by decent gains in Ocado which has been upgraded by Berenberg Bank, while on-line electrical retailer AO has also jumped sharply.

The best performing house builders have been Barratt Developments, Taylor Wimpey and Bovis Homes, after big declines yesterday.

US

US markets opened sharply higher after closing at three month lows yesterday, helped by the firmer tone in European markets. On the data front US Q1 GDP saw a revision higher from 0.8% to 1.1%, though on the downside a fall in personal consumption from 1.9% to 1.5% suggested that the US consumer wasn’t anywhere near as robust as originally thought. While the expectation is that this may well have rebounded in Q2, it is disappointing that this part of the puzzle may well have been overplayed.

Other economic data suggests a more mixed picture with consumer confidence in June jumping sharply to 98 from 92.4, though the latest Richmond Fed manufacturing index showed another contraction in economic activity slipping to -7 from -1.

On the companies front Dow Chemical announced that it would be cutting 2,500 jobs ahead of its planned merger with DuPont.  

FX

The pound has enjoyed a welcome relief rally today, despite last night’s double ratings downgrade, after posting new 31 year lows against the US dollar, as sentiment starts to stabilise in the wake of last week’s surprise UK referendum vote outcome. The two day slide in sterling was certainly exacerbated by the mistaken belief that we were going to get a “Remain” outcome particularly since we got a 7% move higher in the week leading up to the vote from 1.4000 to 1.5000. In that context a sharp down move shouldn’t have come as too much of a surprise, given how badly the market was positioned, and that is exactly what we got as we dropped quickly well through the previous lows.

The big question now is where we go to next and in that context that remains unclear, though on a trade weighted basis we are still above the sterling lows we saw in 2013, which suggests we should probably tone down the hysteria somewhat.   

The Norwegian kroner is also outperforming as oil prices rebound from one month lows.

The Japanese yen has been the worst performer on the back of a slightly less risk averse tone to the day and the rebound in US equity markets.

Commodities

Oil prices have rebounded from one month lows on expectations that we could see another weekly decline in inventories, as well as a slightly weaker tone to the US dollar, as expectations about a US rate rise start to shift ever so slightly towards a rate cut. 

Gold prices have slipped back slightly as the more stable tone in markets encourages some light profit taking and bargain hunting in stock markets.

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