UK and Europe
Brexit is adding fuel to the fire for risk averse investors. Markets are already worried about slowing global growth and the inability of central bank policy to stem the decline. The June 23 EU referendum gives a specific date when all the market’s troubles could come to a head.
Stocks and the British pound are being shunned in favour of havens like German and British bonds, the yields of which have struck new record lows. Expectations of weak global growth and ever-enduring easy monetary policy, likely to be reinforced at central bank meeting this week, is seeing a mass exit from equities and feeding demand for bonds, sending yields to record lows.
Sky high demand for fixed income has sent German 10 year bund yields negative for the first time in history. ‘Fixed Income’ has taken another leap towards ‘Fixed Expenditure’.
General risk aversion has sent the FTSE 100 below 6000 for the first time since February with a drop in mining, banking and homebuilder shares contributing the most to the decline.
A report from Jefferies suggesting Barclays (LON:BARC) might be the most exposed bank to a British exit from the EU has sent shares spiraling lower on Tuesday. Barclays is thought to be most exposed through its exposure to investment and corporate banking whilst the impact on Lloyds (LON:LLOY) would be though any economic slowdown because of its mortgage portfolio. Every bank listed on the UK benchmark saw losses in excess of 1% in a read-across from the selling in Barclays and overall concern over the upcoming referendum.
US
US stocks opened lower tracking the dip in oil prices, though better than expected retail sales data cushioned the blow. The financial sector was the biggest early decliner on the S&P 500 as nerves kicked in on the first day of the two-day meeting of the Federal Reserve.
Stocks can stabilise so long as the ratio of ‘weak growth : Fed easing’ is maintained. The market needs the Fed to reaffirm a cautious stance to rate rises to find its happy place again.
Shares of Apple (NASDAQ:AAPL) rose on Tuesday, weathering an underwhelming reaction to its latest product updates including the introduction of iOS 10 and an Apple Music overhaul.
FX
The British pound was again centre of the FX universe, slumping for the fourth day in five after the Sun newspaper came out in favour of Brexit and another poll showed the ‘Leave’ camp ahead. Cable dropped over 100 pips, giving back the late bottom-fishing reprieve on Monday.
The US dollar rose on Tuesday, erasing yesterday’s decline, helped by a smaller than expected decline in US retail sales growth. US retail sales rose 0.5% against expectations of a rise of 0.3% with sales excluding auto matching expectations of a 0.4% rise.
Commodities
The price of gold erased an early attempt at profit-taking, extending its recent run of gains to seven out of the last eight days. Sources suggesting the ECB would backstop markets in the event of a Brexit perhaps takes some of the risk off the table. However, the extra wash of liquidity would be another reason to excite gold bugs.
Oil prices dropped for a fourth day ahead of inventories data from the API. A report from the IEA suggesting non-OPEC supply (US shale) will grow again next year has weighed on the oil price on Tuesday. Oil’s four-day decline is symptomatic over an overall pullback from risk amid global growth concerns before the US interest rate decision.
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