In an absolutely stunning four day turnaround the FTSE100 has managed to post not only its lowest level in 4 months at the end of last week, but also its best close since April 21st as yesterday the UK’s main benchmark managed to reclaim all of its post Brexit losses, and could well finish the month in positive territory.
Even so it remains very much an outlier when compared to other stock markets around the world, which means we need to treat it with caution, particularly since the FTSE 250 is still 7.5% down over the same period, and US stocks also remain shy of their highs last week.
Elsewhere in Europe it’s a similar story with the DAX still nursing losses of 6%, while Italian markets have fared far worse, still languishing over 11% lower as concerns about the health of their ailing banks and economy weigh over stock markets.
It is here that Europe’s pressure point remains, as concern about the solvency and profitability of the sector weighs on risk appetite. Despite the recovery in the FTSE100 the FTSE banks index still remains down 11% from its pre Brexit levels as the prospect of lower for longer interest rates keeps investors cautious. Contrast that with the Italian banks index which is down 26% over the same period, just above its record lows seen in 2012, as Italian authorities struggle to restore confidence in their banks.
Last night the Federal Reserve’s latest annual stress tests cast concerns over the US subsidiaries of Deutsche Bank (DE:DBKGn) and Santander (MC:SAN) along with Morgan Stanley (NYSE:MS) on the basis of broad and substantial weaknesses in their capital planning processes. While both subsidiaries are separate from their European parents the fact that both have failed the tests for the second year in a row isn’t likely to inspire confidence at a time when both banks parent entities need it more than ever.
These weaknesses across the sector will make it that much more difficult for the ECB to cut rates much further in the short term particularly since bond markets around the world are already pricing in further easing measures with little prospect of an improvement in the medium term. With over $11trn of bonds already showing a negative yield, bond investors seem to be thinking that this rebound in stock markets may well not last, either that or they are hedging their bets heavily.
Today’s latest June EU CPI numbers aren’t expected to offer much comfort on the inflation front with a slight improvement to 0% from -0.1%, with core prices steady at 0.8%.
As for the UK economy the final Q1 GDP estimate is expected to show growth of 0.4%, though most eyes will be on the current account balance which is expected to come in at around -£30bn. This deficit has raised concerns given that we import so much more relative to what we export. In layman’s terms we have a huge overdraft with the rest of the world that needs funding.
That isn’t normally a problem until or unless the investors that finance it suddenly lose confidence in the stability of the economic or political environment, and it can also suggest that the economy is unbalanced, which we know that the UK’s economy is.
EUR/USD – continues to struggle above the 1.1100 area, and 200 day MA which keeps the pressure on the downside and could well see a move towards the March lows at 1.0825. To stabilise we need to see a move back above the 1.1250 area.
GBP/USD – continues to make gains away from the 1.3120 level slipping back from 1.3530 yesterday. To stabilise and mitigate the risk of a move below 1.3000 towards 1.2800 we need to see a move back through the 1.3650 area.
EUR/GBP – has found support at 0.8205 after sliding back from the 0.8370 area the 2014 highs as well as the 50% retracement of the move from the 2008 highs at 0.9802 to the 2015 lows at 0.6934. A move through here could well see a move towards 0.8706. Key support comes in at 0.8120, and the April highs.
USD/JPY – has managed to stay above the 100 level after rebounding from 98.95. We need to get back through the 103.50 area to retest the 105.50 area. A move below 100.00 is likely to prompt the risk of further losses and possible BoJ intervention concerns.
Equity market calls
FTSE100 is expected to open 7 points higher at 6,367
DAX is expected to open 31 points higher at 9,643
CAC40 is expected to open 5 points higher at 4,200
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