Europe
European markets have continued where they left off on Friday boosted by speculation of further stimulus from the Bank of Japan after a victory by Japanese Prime Minister Shinzo Abe in Japanese Upper House elections at the weekend, raised expectations that an improved mandate will prompt the Japanese government to finally implement the long awaited third arrow of Abenomics.
The FTSE100 continues to push on, heading towards its highest levels since last August, driven higher by the mining sector in particular, but also getting a boost from banks and house builders after Andrea Leadsom pulled out of the contest to be Conservative Party leader and UK Prime Minister, leaving the way clear for Theresa May to potentially be in post well before the October deadline set by David Cameron. After all given that all her rivals have fallen by the wayside what’s to be gained by waiting?
Amongst the biggest gainers have been Berkeley Group (LON:BKGH), Barratt Developments (LON:BDEV) and Taylor Wimpey (LON:TW) along with Royal Bank of Scotland (LON:RBS).
The FTSE 250 has also enjoyed a decent bounce, up nearly 3% hitting its highest levels since its plunge from its 23rd June peaks. This removal of one element from the mix of political uncertainty is likely to bring into sharp relief the next stage of the “Brexit” process and in particular the timings of when Article 50 is likely to get triggered.
Much has been made in recent days of how the FTSE250 has underperformed the FTSE100 which managed to leave its pre referendum peaks behind it within a week of the vote, but it also ignores that fact that since its all-time highs of 18,393 over a year ago the FTSE250 is still only down less than 10%, a fairly decent performance given all the uncertainty about the UK’s economic future.
This compares more than favourably to the German DAX which is over 20% down from its peaks, and the FTSE MIB which is over 30% down from its 2015 peaks, as concerns about the solvency Italian banks continues to overshadow proceedings.
Sliding consumer confidence and slowing consumer spending has raised some concerns about domestically focused UK retailers profit margins there aren’t that many concerns about retailers with a more international focus. For example on the luxury side while the decline in sterling against the US dollar and the yen will help Burberry’s (LON:BRBY) overseas earnings the share price saw a sharp rally on news of a senior management reshuffle that involves current CEO Christopher Bailey taking a step back to be replaced by Marco Gobetti, head of Celine, and the departure of CFO Carol Fairweather.
As the Farnborough Air Show gets under way the slide in sterling looks set to provide a nice boost to the aviation sector, though Rolls Royce (LON:RR) shares have slipped back despite announcing its intention to pay €720m over the next two years to purchase the remaining 53.1% shareholding it has in Spanish aero engine component manufacturer ITP.
US
US markets opened higher this morning following on from Asian and European markets with the S&P500 trading at new all-time highs, as last week’s payrolls number and speculation about further stimulus contrives to push capital into equity markets and away from bond markets.
While US payrolls continue to run at a fairly decent rate the Federal Reserve Labour Market Conditions Index for June continues to remains weak declining again for the sixth month in a row, coming in at -1.9, an improvement on May’s -3.6, but still yet to show a positive reading in 2016.
Earnings season also gets under way this week with Alcoa (NYSE:AA) reporting after the bell. Given the rebound seen in commodity prices so far this year the hope is that we’ll see a decent number this quarter.
Banking stocks are also likely to be closely watched this week, given concerns about investment banking earnings in a low or negative interest rate environment. How badly has the slow slide into negative territory of global bond yields hurt the profitability of US banks?
FX
The pound initially came under pressure this morning ahead of a likely rate cut from the Bank of England later this week; however this afternoon’s confirmation that Andrea Leadsom had withdrawn her candidacy from the Conservative Party leadership process helped the pound rally back through the $1.3000 level after briefly slipping below 1.2900.
The yen has weakened on expectations that we could see further Bank of Japan stimulus as well as structural reform after Japanese PM Shinzo Abe won an improved mandate in Upper House elections at the weekend which could make him bolder in terms of policy steps to turn the Japanese economy around.
Commodities
Oil prices have stabilised near two month lows after the latest US rig count number jumped to its highest level in nearly 3 months, as idle rigs are brought back on line as oil prices stabilise around the $50 a barrel level. Even though we’ve seen a slight pull back from last month’s peaks the downside so far has been fairly limited despite speculation of further increases in production capacity from Iran, and the likelihood that US rig counts will continue to edge higher, the longer prices stay near their current levels.
The improvement in risk appetite and general better tone in stock markets has seen gold prices slip back though it still remains above its post Friday payroll lows.
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