TradeTheNews.com Weekly
Market Update: Investors Find Brexit Solace in US Equities & Government
Bonds
Fri, 08 Jul 2016 16:15 PM EST
Global financial markets remained volatile under the continuing influence of
the UK Brexit vote two weeks ago. The 10-year UST yield sank to fresh record
lows below 1.35%, and buyers of 50-year Swiss government bonds got ready to
accept a negative yield this week as malaise settled over the entire global
economy. The pound, which hit a 31-year low against the dollar of 1.2800 on
July 6th, gave up recent gains and sank back below 1.3000, while the dollar and
yen remained strong. Crude prices sank lower, with WTI back in the $45 handle
and Brent back around $46. In the UK, various investment firms suspended
redemptions in open-ended property funds as investors rushed to take out their
cash, while investors eyed the Italian banking system with deepening concern.
On Friday, the very strong June US jobs report lifted stocks broadly to flirt
with all-time highs in the S&P. US Treasury yields stayed stubbornly low,
as global demand for assets that offer any kind of relative yield remains
unwavering. For the week, the DJIA +1.1%, the S&P500 +1.3% and the Nasdaq
+1.9%.
The June US jobs report was very strong and may have been good enough to bring
forward Fed rate hike expectations after the setback of Brexit. The 287K
non-farm gain was way ahead of even the most optimistic estimates, although the
result only brings the Q2 average up to +147K, versus +196K in Q1. Unemployment
ticked up to 4.9% from 4.7%, however the household survey showed an incremental
decline in labor market slack as the participation rate ticked slightly higher.
Global currency markets remained under pressure from the Brexit vote. Sterling
slid lower on Monday and Tuesday, then appeared to stabilize around 30-year
lows in the second half of the week, but remained firmly below 1.3000. The yen
remained a safe haven, with funds flowing into the Japanese currency despite
some weak economic data reports. USD/JPY had traded back up to 103.25 last
week, but as of Friday the pair was back to the critical 100 level, which was
briefly breached during the Brexit vote panic and subsequently held unchallenged.
The volatility prompted Vice Finance Minister & FX Chief Asakawa to warn
the government was "closely watching" FX markets with urgency and
would act promptly if there were "speculative moves." EUR/USD was
steadier and held above the 1.100 level.
The second-order effects of the Brexit vote further dampened confidence. Seven
UK investment firms suspended trading in property funds this week, freezing £15
billion of assets since Monday, out of a total of £24 billion invested in UK
open-end real estate funds. Many comparisons were made to the failure of Bear
Stearns' hedge funds in the summer of 2007, although the total amount held in
such property funds is extremely modest. Press reports asserted that funds
Henderson, Columbia Threadneedle and Aberdeen were maintaining positive cash
balances but chose to halt withdrawals to "protect" investors.
The ongoing selloff in the Italian bank stocks continued apace, leading the
nation's market regulators to ban short selling of shares of Banca Monte Paschi
for three months. Italy's banks are burdened by €360 billion of non-performing
loans, the equivalent of a fifth of the country's GDP. Collectively they have
provisioned for only 45% of that amount. With shares sinking faster post-Brexit
vote, there is building pressure for more bail-in funding for the system, and
there were reports the government would set up a second fund - dubbed Atlante
2, with €3-5 billion in capital, after the Atlante fund set up earlier this
year - to help clean up the mess.
The yuan weakened for the fifth week in a row, marking the longest losing
streak for the Chinese currency this year. USD/CNY has risen to 6.6873, the
yuan's weakest setting against the greenback since the first quarter of 2010.
The June China FX report disclosed the biggest one-month gain in reserves in
over 12 months, leading many participants to speculate that the PBoC has halted
its regular FX market interventions and allowed the yuan to weaken in its quest
to revive economic growth. The currency also saw its biggest weekly drop
against a trade-weighted basket of 13 currencies in four weeks, another sign
that Beijing has become tolerant of further declines. There was little hard
data out this week - the Hong Kong PMI contracted for the 16th straight month
in June as conditions deteriorated to their worst level since last summer - but
speculation about PBoC rate cuts heated up and many analysts are saying another
cycle of RRR cuts is in the offing in the second half of 2016.
The contagion of political uncertainty has infected another major economy, this
time Australia. Last Sunday, Australians went to the polls to elect a new
federal parliament, and almost a week later, Liberal/National Coalition and
Labor remain basically deadlocked. The Australian Electoral Commission is
recounting all ballots before announcing the official result, and as of Friday
the conservative National Coalition is leading with 74 seats, followed by the
Labor Party with 71, with the former ceding at least 16 seats to the latter. It
appears that National Coalition will most likely be forming a government, but
S&P lowered their outlook on Australia's AAA rating to negative from stable
on Thursday as the lack of a strong mandate potentially dinged the future
government's prospects for reining in the budget deficit.
Retailers reported much improved sales comps for the month of June. The
Father's Day holiday on June 19, a calendar shift reporting the sales of
Memorial Day weekend in June and good weather all contributed to boosting the
month's business. Gap disclosed its first positive monthly comps report of
2016, with Old Navy posting a +5% comp. After flattish April and May SSS, L
Brands posted an increase of 6%. The numbers may herald a third month of good
total US retail sales (the June US retail sales report drops next Friday),
after much better than expected April and May retail sales. However, many other
retail comp sales reports remained deep in the red, with Zumiez, Buckle and
Cosi reporting terrible numbers.
