Europe
It’s been another grim day for equity markets with the usual suspects of banks, house builders and retail stocks taking a beating once more.
In the wake of yesterday’s property fund suspensions Aviva (LON:AV) released a statement saying that it was too soon to judge the impact of Brexit on the company and the value of its holdings.
Despite this assurance sentiment continues to remain fragile with Aviva, Prudential (LON:PRU) and Legal and General (LON:LGEN) all down heavily, while RBS (LON:RBS) and Lloyds (LON:LLOY) have also continued to decline on reports that they are the most exposed to the commercial property sector.
Expectations about a possible cut in interest rates next week probably aren’t helping banks either. Bank of England Governor Mark Carney may have given the banks additional latitude to lend money to the real economy, but will he then compound UK banks profitability problems by cutting rates so quickly?
He stated yesterday that “some monetary policy easing will likely be required over the summer,” which doesn’t sound like someone in a hurry to cut rates yet, even though many on the MPC may think otherwise. As things stand monetary conditions have already eased considerably with borrowing costs already sharply lower, and judging by his comments about low rates reducing bank profits and credit availability, the bank could well wait and see..
While economists have predicted we could see interest rates fall as soon as next week, can we really be so certain, given that the inflation report in August could well give us a clearer picture?
We can already see from the experience of European banks so far this year, since the ECB slashed interest rates, that lower and negative rates have caused these banks to retrench and impaired their profitability, a fact that continues to be reflected in the share prices of Credit Suisse (SIX:CSGN), UBS (NYSE:UBS) and Deutsche Bank (DE:DBKGn), all down at new record lows again today, along with most of the Italian banking sector.
Food retailers have also had a difficult day with Tesco (LON:TSCO) and Morrison (LON:MRW) shares sharply lower after being downgraded sharply over concerns about a new price war. Given that shop price deflation for June showed a 2% decline in data out this morning this doesn’t seem an unreasonable assumption, which probably explains why Sainsbury (LON:SBRY) shares have followed suit.
On the plus side it’s been the gold miners who have once again outperformed, while Burberry’s (LON:BRBY) share price has also held up well. Its exposure to overseas markets could well see its profits get a bounce on the back of the weakness of the pound when it updates the markets next week.
US
US markets continued their post 4th July hangover today following the slide in European markets and opening sharply lower, as growth concerns and plunging bond yields kept investors on the back foot.
The latest US trade numbers for May showed that the deficit widened to $41.1bn from $37.4bn in April as the rebound in the US dollar helped dampen export growth, though a lack of global demand may well have also played a part as well.
The latest ISM Non-Manufacturing index for June showed a decent recovery in June, coming in at 56.5 from 52.9, with some decent internals across the board, however this doesn’t really chime with the latest Markit PMI which nudged higher at 51.4.
In earnings news Walgreens Boots (NASDAQ:WBA) posted earnings slightly above estimates for the most recent quarter, though revenue came in light.
Tesla Motors (NASDAQ:TSLA) remains in the spotlight over the recent fatal crash involving its autopilot feature, as the investigation continues as to the cause of the accident.
Tonight’s FOMC minutes are likely to be nothing more than a footnote at a time when the world has moved on since the meeting eight days prior to the UK referendum vote.
FX
The pound has continued to get eviscerated on the currency markets hitting a fresh 31 year low of 1.2797 in Asia trading early this morning, and while the fall here continues to hog the headlines on a trade weighted basis while the falls have been sharp it is only back near levels last seen in 2012, as expectations rise about a potential rate cut and more QE at next week’s Bank of England rate meeting.
Of more importance is the impact of its decline against the Japanese yen where it has fallen 29% since November last year, with half of that fall in the last two weeks alone. This is not likely to go down particular well at the Bank of Japan where Mr Kuroda is likely to be spitting out his sake as his attempts to reinvigorate the Japanese economy slowly go up in smoke.
The Japanese yen has been the biggest gainer once again today coming within a whisker of the 100.00 level against the US dollar as the prospect of US rate rises recede further into the distance.
Commodities
Oil prices have come under pressure having failed to consolidate moves above the $50 level against a backdrop of disappointing economic data, raising the prospect that the overhang in inventory could well take longer to work off. This week’s news that OPEC production in June was higher than expected has also weighed on the price raising the prospect that this week’s inventory data could well see recent run of draws turn back into builds.
Gold and silver prices have continued to edge back up again despite yesterday’s sharp pullback in the silver price with gold prices hitting two year highs as prospects of any sort of tightening policy get ever more remote.
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