The unexpected removal of an additional two months of uncertainty as Andrea Leadsom suddenly dropped out of the race to replace outgoing Prime Minister David Cameron and elevated Theresa May to the top position in UK politics, helped push the FTSE100 to new 11 month highs yesterday and the FTSE250 back to levels last seen the day after the referendum vote.
Equity markets carried on from last Fridays strong gains, as the multiple boost of a decent payrolls number, and the promise of additional stimulus measures out of Japan contrived to turbo charge equity markets in the last few days.
While the mid cap index now just over 3% below its pre Brexit highs, it still managed to close at its highest level since the 23rd June, the day of the Brexit vote, thus largely mitigating the worst effects of the Brexit shock in terms of the benchmark effect.
With the political transition likely to be done and dusted by the middle of the week we could well find out quite quickly what the next steps are with respect to time lines and intentions with respect to the UK’s relationship with the EU and article 50.
It would seem that for now financial markets like the idea of a known quantity at the head of government in the form of Theresa May as opposed to the unknown quantity that was Andrea Leadsom, that being said our new PM isn’t likely to get too much of a honeymoon period. Furthermore if EU leaders think they are in for an easy ride because she was a “remainer” they may soon find out first hand that in the words of Ken Clarke, that she can be a “bloody difficult woman””. She will certainly need to be given the size of the task ahead of her as well as keeping the “Leavers” in her party on side, as she looks to fulfil her pledge to deliver “Brexit”.
Despite the recoveries being seen in share prices pressure points still remain in the UK economy, namely in the commercial property and house building sectors, while the banks also remain vulnerable given the flattening of the UK yield curve in the last two weeks.
Retailers have also seen their share prices hit quite hard over concerns about the effects to consumer confidence and spending habits, with the latest BRC retail sales numbers for June showing a decline of -0.5% in June, down from a 0.5% rise in May.
The main casualty of the Brexit vote continues to be the pound which has slipped back sharply in the last three weeks, while UK government bond yields have slid sharply on expectations of further easing from the Bank of England, which could come as early as this week.
The rush into UK gilts has also been helped by that fact that along with US treasuries they still have a positive yield unlike most short and medium term yields across Europe.
Later this morning Bank of England governor Mark Carney appears in front of MP’s along with other members of the Financial Stability Committee to answer questions about the central banks recent measures to ensure markets were orderly in the aftermath of the referendum vote.
US markets also kicked on yesterday with the S&P500 posting new all-time highs as US investors continued to take comfort from an expected status quo when it comes to US rates for the next few months. While last week’s payrolls numbers were extremely encouraging the Fed’s Labour Market Conditions index continued to show puzzling weakness coming in negative for the sixth month in a row. This is sure to worry Fed policymakers given that behind the headline payrolls number this indicator is back near levels last seen in 2009.
EURUSD – still doing nothing as the euro continues to struggle with the bias remaining towards a move towards the March lows at 1.0825. To stabilise we need to see a move back above the 1.1250 area.
GBPUSD – continues to chop between the recent lows and the highs at 1.3050. We remain at risk for a short squeeze towards 1.3150 in the near term, but while below the bear flag the risk remains for a move through 1.2800 towards 1.2500.
EURGBP – appears to be running out of steam on the topside, with a break below 0.8480 targeting a move towards 0.8400. While above here the euro still looks set for a move to the 0.8706 area, 61.8% retracement of the big down move from 0.9805/0.6535. A move back below the 0.8400 area would delay this outcome.
USDJPY – has thus far held above the 100 level but while below the 103.50 area the risk remains for a return to the previous lows at 98.95. A move below 100.00 is likely to prompt the risk of further losses and possible BoJ intervention concerns.
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