UK and Europe
Stock markets slumped on Thursday with an aversion to risk again taking hold. With less than a week to go until the EU referendum; investors were playing even more defensive than the Wales in their Euro 2016 match against England.
The FTSE 100 falling to a fresh 15-week low led lower by banking shares, thought to be the most exposed to Brexit, and mining shares which dropped with oil amid global growth fears. Gold rising sharply above $1300 per oz to 22-month highs put gold-miner Randgold (LON:RRS) top of the UK benchmark.
Brexit concern has been brought back to the fore. The Federal Reserve cited the referendum as a one of the factors in its decision not to raise US interest rates in June, and an opinion poll from Ipsos Mori has shown a 53:47 lead for a vote to leave the EU.
The Brexit debate has encircled the Bank of England as it again opted to keep interest rates on hold at 0.5%. BOE governor Mark Carney has written a letter defending the Bank of England’s right to talk about Brexit during the political purdah period before the election. Mr Carney is either vigorously defending the independence of the Bank of England or acting as stooge for the government. The one you believe likely depends on your voting intensions.
Whilst the Bank of England kept rates on hold, in part due to the economic risks of the referendum, another strong data point has shown the UK economy is ticking along nicely. UK retail sales for May grew 0.9% m/m, much faster than the 0.2% rise expected.
US
US stocks sank, led lower by energy and financial sectors where the profitability of firms are under pressure from falling oil prices and low interest rates.
In the context of falling oil prices and the Brexit vote, the Federal Reserve’s unwillingness to raise rates is being seen through the lens of weak global growth. Inaction from the Bank of Japan in the face of deflation and a rising Japanese yen is symbolic of central banks operating with an empty toolbox.
The Fed’s belief that “gradual increases in the federal funds rate” are appropriate has been overshadowed by talk of a “loss of momentum” in the US labour market and a reiteration of the need to “proceed cautiously”. The changes in the dot plot combined with Ms Yellen’s emphasis on caution takes July off the table for a rate hike, and more-than-likely September too.
US CPI rose at a slower than expected 0.2% m/m in May, down from 0.4% in April. The annual pace of inflation has slowed to 1.0% whilst core CPI remains steady at 2.2%.
FX
A flight to safety has seen the US dollar gain against every major currency except the Japanese yen, despite weaker than expected inflation data and a cautious Federal Reserve.
The yen has rallied hard across the board following the Bank of Japan’s decision to leave rates on hold. USD/JPY broke below 104 whilst EUR/JPY fell as much as 3% to below 116. Any flicker of hope the BOJ might have had that the Fed would bail them out by raising rates, allowing the yen to weaken against the dollar, may have just been extinguished. Should the yen’s appreciation pick up pace again, the BOJ intervention risk increases. The ‘anti-currency manipulation’ tone of the last G7 summit probably means BOJ intervention won’t happen while USD/JPY is above 100.
The British pound looked through strong UK economic data, falling again on Thursday, with few traders willing to hold onto the British currency before the EU referendum
Commodities
The price of oil slid for a sixth day, in signs oil bulls are beginning to give up the ghost after prices struck $50 per barrel and the US dollar rises. The return to full tilt Canadian production after the wildfire disruption has offset the US supply drop. If oil dip-buyers aren’t going to come in following the 4th weekly draw in inventories, a bigger price decline could be on the cards.
The price of gold topped $1300 per oz to reach its highest in 22 months. Rising global risk aversion ahead of the Brexit referendum and a dovish Fed provided two reasons to buy the precious metal.
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