Financial markets are reversing some of this week’s losses as the EU referendum campaign remains on hold following the tragic events that unfolded in Yorkshire on Thursday. The Chancellor and BOE Governor Mark Carney both paid tribute to MP Jo Cox at their annual speech at the Mansion House. These speeches are usually full of market-moving reveals, however, as a mark of respect neither Osborne nor Carney’s planned speeches will be released.
The markets are much quieter today than they would normally be with less than a week to go before the referendum. However, the pause in the market panic over Brexit has highlighted the other factors at play that still have the potential to move markets whatever the referendum result next week.
The UK economy defies the Referendum gloom
These include the large increase in UK retail sales for May and FX intervention risks from Japan. UK retail sales rose by an astonishing 6% annually last month, after a major boost in the sale of clothes and booze. The Office for National Statistics puts this down to the weather effect. Interestingly, the actual amount spent on clothes in May 2016 was less than in May 2015, even though volumes were higher, suggesting that the large increase in sales was down to price cuts at retailers. Even so, this suggests that Q2 GDP growth could eclipse the 0.4% increase in Q1, regardless of the Referendum result.
The retail sales report came on the heels of better than expected labour market data for April. The unemployment rate for the three months to April fell to 5%, while wage growth rose a notch to 2.3%. Based on the data only, you would not expect the markets to be pricing in a rate cut in the next 6 months, or for UK 10-year bond yields to plunge to their lowest ever level.
Negative bond yields – a dangerous precedent
UK bond yields are following the global trend for lower yields in recent days. However, this could be a dangerous trend. German bond yields fell into negative territory earlier this week (they have since moved back into positive territory) for the first time since the 1920s. Back then the decline in bond yields was a major contributor of the hyperinflation that blighted the German economy in the late 1920’s and 1930’s. This does not bode well for the UK, or the global economy in general.
Intervention risk rises
In recent days we have mentioned the increasing risk of central bank intervention in the FX market. Today, the Japanese finance minister confirmed our fears, and suggested that the authorities would intervene if the yen does not fall back from a 2-year high versus the USD. We will have to see if the market pays heed to the Japanese authorities; if we see a resumption of referendum-inspired volatility next week then the yen is likely to experience extreme volatility. We expect the Swiss authorities to be equally vigilant and also limit Swissie upside in the coming days.
Is the tech sector immune to global fears?
Interestingly, the tech sector might have developed immunity to the problems facing the wider global economy. It has brushed off Brexit-inspired worries and the M&A boom remains in full swing. Microsoft (NASDAQ:MSFT) has bought LinkedIn (NYSE:LNKD) for more than $26bn, the first of two acquisitions this week. It appears that the older, more established tech firms like Microsoft are willing to pay a premium to acquire younger tech firms who are developing more exciting technology. Companies like Microsoft, Apple (NASDAQ:AAPL) and Salesforce (NYSE:CRM) have large amounts of cash they could spend, thus this M&A boom may have much further to go, which could be a life-saver for global stock markets in the second half of the year.
Referendum back in the spotlight
Overall, the focus is likely to return to the UK referendum this weekend. The latest opinion polls will be released on Sunday, and these are likely to be the key drivers of the financial markets at the start of next week. Unless we see a major shift in support for the Remain camp, then we may see further declines for the pound and other risky assets in the days leading up to the vote.
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