UK and Europe
There was a calmer state of play in markets on Tuesday. The kind of short-squeeze that happened at the end of last week and in the early part of this week could only go on so long. It appears markets have made up their mind which way the referendum will go, but before the result is known, there is still two-way risk.
The FTSE 100 erased small early losses but remained basically flat for most of the day as a drop in mining shares were offset by continued strength in the financial sector. Bond yields are rising off recent year-to-date lows and that supports net interest margins at banks the ability of insurance companies to generate a return on customer assets. With Brexit front and centre of investors’ minds, the more internationally-exposed mining shares have moved out of the limelight.
More prominent support for remaining in the EU from legendary investor George Soros, former UK supermarket chiefs and even ex-England football captain David Beckham will all go some way to sway public opinion. Mr Soros said a Brexit vote would cause a bigger drop in sterling than on Black Wednesday when he famously made $1bn betting against it. Black Wednesday was an unexpected Black Swan event with direct implications for the valuation of the currency. It seems far-fetched that Brexit, something polls have indicated could easily happen, would have anything close to a similar effect.
Polls released on June 21 showed a slight bias to Remain winning the referendum. A Survation poll put remain 45-44, tipping the balance after an ORB poll gave Remain a seven-point lead whilst another from YouGov gave Leave a two-point lead. The mixed poll results suggest the vote is too close to call. Which beggars the question where the apparent confidence in betting and financial markets has come from? If the jump in sterling and equities is purely investors repositioning and unhedging, another shift in the polls favouring Leave could see odds improve again and financial markets correct.
US
US stocks opened higher on Tuesday, though came off the highs as the dollar rose amid testimony from Fed Chair Janet Yellen to the Senate Banking Committee. Ms Yellen repeated the Fed’s cautious intent to gradually raise interest rates. The Fed Chair repeated that low productivity growth, developments abroad, the recent weakness in the labour market and the UK’s EU referendum were risks to the US economy.
Shares of Lennar (NYSE:LEN) opened higher after the homebuilder reported profits and revenues above expectations, citing a steady improvement in the US housing market.
FX
The US dollar rose on Tuesday, largely unperturbed by a mixed testimony from Fed Chair Janet Yellen, which didn’t alter market expectations for the next US rate rise.
The British pound reached a new 2016 high against the US dollar, aided by a drop in UK public sector borrowing but fluctuated in a large range. GBP/USD gravitated towards 1.47 after referendum poll results came out mixed. Risks remain tilted to the downside for sterling while it remains below the highs of this year.
Commodities
Gold and oil prices fell in equal measure on Tuesday. The direction of the US dollar was playing a bigger role than risk on/off positioning. Gold fell to a seven-day low after breaking support at $1275 per oz whilst Brent crude found resistance at $50 per barrel.
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