UK and Europe
Markets have taken a bit of a Brexit breather. Stocks have seen a modest rebound from a sharp sell-off at the start of the week. The rise is more a function of short-covering ahead of the Federal Reserve meeting than any sudden desire to take risk.
The Rolls Royce (LON:RR) letter to employees highlights how Brexit is very much at the forefront of investment decisions right now. Rolls Royce boss Warren East has said the referendum puts the decision to invest in the UK “on hold”, offering the example of a planned engine testbed facility. Mr. East has said the “pause” will give American rivals like GE an advantage.
When Rolls Royce speaks Britain should listen; it’s our biggest engineering company and represents 2% of all British goods exports. Still, it’s doubtful that a long-term project, involving the expertise of hundreds of British workers, would be derailed by a few months of political uncertainty.
That’s backed up by the latest UK labour market statistics for May, which came in ahead of expectations. The unemployment rate fell to 5.0% from 5.1%. Average earnings growth saw a surprise jump to 2.3% y/y against expectations of a drop to 2.0% from 2.2% previously. The strong UK economic data should give investors, who have been piling into the perceived safety of government bonds ahead of the referendum, pause for thought.
Despite the grilling of former BHS-owner Sir Phillip Green by MPs, UK retail shares including Next (LON:NXT) and Marks and Spencer Group (LON:MKS) felt some positive read-across from decent results from H&M (LON:0HBP) and Inditex (LON:0QWI). The gains are welcome after a warm winter and cold spring dampened clothing sales. These stronger retailer results may dampen the idea that consumers are shifting from “stuff” to “experience”. Still, the results confirm the trend for consumers shifting towards the ‘discount’ end of the clothing market.
Sir Phillip Green fielded questions over the pension deficit, the level of investment he made into the business and how that reconciles with dividend payments made to his family. Sir Philip Green appeared to stumble around the thorny issues of the BHS pension. He accepted ultimate responsibility but struggled to convince MPs how remained aware of the rising pension deficit.
US
US stocks opened higher on the final day of the FOMC meeting, though major averages remain well below where they started the week as anxiety over the pace of future rate hikes remains.
It’s not a matter of whether there is an interest rate hike, markets are pricing a zero percent probability the Fed moves in June. The meeting is more about whether Janet Yellen’s words can soothe rattled markets while staying upbeat on the US economy and keeping a rate rise at the next two meetings alive.
The language should be something akin to ‘it’s probably appropriate to gradually tighten policy' but again highlight the decision’s data-dependency. The Fed also updates economic forecasts. The forecasts themselves aren't worth the paper they are written on but can be extrapolated to how quickly Fed would want to raise rates again. May’s weak unemployment report may hinder how bullish the Fed can be in its forecasts.
FX
Currency markets were mostly flat before US interest rate decision, barring a jump in the British pound amid short-covering and strong UK labour market data.
Commodities
Oil markets recovered early losses after weekly DOE inventories data reported a smaller than expected draw, but didn’t confirm the build suggested by the API. Falling US production is supportive of the oil price, so the major risk to a jump back above $50 per barrel appears to be dollar strength following a hawkish Fed.
The price of gold was basically unmoved before the Fed.
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