FTSE100 set to wipe out Brexit losses, though FTSE250 continues to lag

Putting to one side the pantomime taking place in Brussels today as EU leaders laid out their common stance on next steps with respect to article 50, and the UK’s use of it, we’ve also seen EU Commission President Jean Claude Juncker’s attempts at mischief making by meeting Scottish First Minister Nicola Sturgeon.

Europe

Putting to one side the pantomime taking place in Brussels today as EU leaders laid out their common stance on next steps with respect to article 50, and the UK’s use of it, we’ve also seen EU Commission President Jean Claude Juncker’s attempts at mischief making by meeting Scottish First Minister Nicola Sturgeon.

This appears to have opened up a veritable hornets nest in Spain with respect to the secession ambitions of Catalonia; however equity markets have looked past the Pandora’s box of politics and have continued to move higher with the FTSE100 looking to close at or above last Wednesday’s closing levels.

European stocks have also fared well along with the FTSE250, but unlike the FTSE100 they still remain well below their pre Brexit peaks.

Today’s gains have been much broader based with oil and gas stocks, house builders as well as financials leading the gainers this morning, though travel stocks have remained under pressure over concerns that a weaker pound and the recent terrorist attacks in Turkey could deter UK consumers from going abroad. The worst performers have been TUI Travel and British Airways owner International Consolidated Airlines.

Dixon’s Carphone has also come under pressure after reporting full year results and agreeing a major US expansion program in conjunction with Sprint.

Basic resource stocks have led the way, as a weaker US dollar has prompted a rally in commodity prices, pushing Fresnillo and Anglo American to the top of the FTSE100.

House builders have also enjoyed a welcome respite with Taylor Wimpey and Persimmon out in front while banks have managed to shrug off the Moody’s downgrade which was inevitable in the wake of the sovereign downgrade seen earlier this week.

In reality these downgrades tend to matter less now than they did prior to financial crisis, given that the UK has an independent central bank and can print its own currency. Reports that UK banks had been summoned to the Bank of England to encourage them to keep their lending channels open appear to have also reassured.

German and UK bond yields have continued to decline after ECB officials made clear that they remained willing to provide more stimulus if the inflation outlook were to worsen, as investors continued to price in a lower growth path. This has seen the total sum of negative yielding bonds globally increase to a number now in excess of $11trn.

US

US markets carried from where they left off yesterday opening higher after the latest personal spending data for May showed that US personal spending slowed slightly from April’s 1.1% gain, coming in as expected at 0.4%. US core PCE inflation stayed steady at 1.6% with most eyes now on next week’s US employment report in the hope that last month’s weak jobs report was a one-off.

US pending home sales showed a decidedly different picture sliding 3.7% in May more than expected while the April numbers were also revised lower to 3.9% from 5.1%.

The main gains in US markets appear to be being driven by energy stocks as oil prices remain resilient.   

FX

The pound has continued its rebound from 31 year lows moving through the 1.3500 level as sentiment continues to stabilise in the wake of last week’s Brexit vote, despite EU leaders continuing to take a firm line on the implementation and sequencing with respect to article 50. This morning’s UK lending data continue to point to no clear evidence of a slowdown in consumer or mortgage lending in May, though think it’s safer to wait until we see the June data before drawing too many conclusions about the outlook from here on in.

The US dollar has been the worst performer once again as trader’s price out the prospect of an imminent move on interest rates by the Federal Reserve, with some estimates putting a likely move out to 2018.

Commodity currencies have also fared well as risk appetite returns on the same basis that US rates are likely to stay lower for longer, with the Australian dollar and Norwegian Krone coming in behind the pound as the next best performers.

Commodities

Oil prices have continued their rebound from their recent lows, helped by a bigger than expected draw in API inventories overnight, and the threat of a strike by Norwegian oil and gas workers. US crude oil inventories also showed a bigger than expected draw, falling by 4.1m barrels against an expectation of 2.3m, as supply inventories continue to diminish as summer demand increases.

Gold and silver prices have continued to edge higher as investors hedge their equity inflows with ETF inflows in what still remains an uncertain economic environment. Inflows are being helped by the fact that more and more bonds are edging into negative territory meaning that a no yielding asset becomes much more attractive relative to a negative yielding one.

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