The week has begun with a profusion of risk aversion across markets. A cagey attitude to taking risk is present in nearly every asset class. Global bond yields have hit new record lows, oil and stock prices are falling whilst the Japanese yen and gold are in demand.
Weak economic data from China and a corresponding devaluation of the Chinese currency appear to be the main drivers for investors shirking risk. Data released on Monday showed growth in Chinese industrial production and retail sales near the lowest levels in a decade. Matching the selling in offshore centres, the PBOC set the yuan fix lower by two handles and back towards five-year lows.
The increased chance of a Brexit vote after more polls showed a lead for Leave is another drag on sentiment. This is most clearly evident in Sterling, which slid for a fourth day, hitting a fresh two-month low against the dollar.
A fear is that the drop in bond yields is a tocsin of recession. Markets are rattled ahead of this week’s central bank meetings from the Federal Reserve, Bank of England and the Bank of Japan. The concern is present despite no change in policy being expected. That a pickup in global growth remains so allusive after seven years of easy monetary policy is increasingly concerning.
Crude oil back below $50 per barrel is perhaps not so much a cause of wider market distress but symptomatic of it. Oil fundamentals are looking shakier both from the demand and supply side. China’s growth outlook looks shaky at best whilst the US rig count rose for a 2nd weak and Iran is boosting production.
Banks are taking the brunt of the selling on the FTSE 100 as Brexit concerns mount. Shares of Lloyds fell nearly 2% of investors fretted over low interest rates and the bank’s high exposure to the UK economy were there a Brexit. Outsourcing company Capita is lower in a read-across from the selling in G4S shares.
G4S is amongst the biggest mid-cap fallers after it emerged the security services company employed the man responsible for America’s worst mass shooting in history. There is always an element of knee-jerk, headline-driven selling in these kinds of circumstances, but the shooting in Orlando could open up a can of worms for G4S.
That G4S has employed a man who’s reportedly been investigated by the FBI three times, once for alleging terrorist ties to co-workers doesn’t reflect well at all on the company’s business practices. G4S has more than 50,000 employees in the US, a large proportion of which are involved in government contracts. If the name of G4S starts getting dragged through the mud, US contracts may become harder to come by. That would be a serious hit to the company’s bottom line.
US stocks look set for a weak open, building on Friday’s sell-off as a risk-off sentiment persists.
USA pre-opening levels
S&P 500: 8 points lower at 2,088
Dow Jones: 61 points lower at 17,804
Nasdaq 100: 16 points lower at 4,445
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