It’s been a torrid few days for equity markets and the pound in particular as it continues to plumb new multi-year lows against the US dollar.
With politicians seemingly intent on making a laughing stock of the UK, with the Labour opposition tearing itself apart, and the Conservative government still debating as to what to do next, the ratings agencies decided to rub salt in the wounds by announcing a raft of downgrades.
Standard and Poor’s removed the UK’s last remaining triple A sovereign rating by two notches to AA citing political uncertainty, constitutional risk and a less predictable and stable policy outlook. Soon after Fitch followed suit also downgrading the rating to AA, citing a “less predictable, stable and effective policy framework.”
While this would have mattered a lot a few years ago, the loss of confidence in the ratings agencies since the credit crisis saw the announcement barely cause a ripple in the markets. As if to reinforce that point UK gilt yields hit new all-time lows below 1%.
Later today Prime Minister David Cameron will be heading to Brussels to attend a meeting of EU leaders in the wake of last week’s vote and while his reception is probably likely to be chilly, there will probably also be some light hearted mentions of last night’s embarrassment on the football fields of France, as England lost to Iceland. Yesterday the Prime Minister announced he would not be triggering Article 50 of the Lisbon Treaty, and also ruled out the prospect of another referendum. Given the poisonous nature of the last one, that may be no bad thing.
On the other side the EU issued a warning that talks on future relations could not begin until the request had been lodged in what could well turn out to be a cross channel staring contest.
Meanwhile the banking sector has continued to get pummeled, and while UK banks are perceived to be more resilient, banks in Europe are anything but, though RBS (LON:RBS) is back near levels last seen in 2009. Fears about further interest rate reductions are raising concerns about future profitability, while EU passporting concerns are also a worry.
Deutsche Bank (DE:DBKGn) has once again hit new record lows while Italian banks have also remained under pressure, with Unicredit (MI:CRDI), Monti Dei Paschi and Popolare (LON:0QRG) all down heavily at new all-time lows, as concerns about the huge amount of non-performing loans prompt new concerns about their solvency.
Reports that the Italian government is weighing up measures that could add up to €40bn into Italian lenders weren’t enough to support the share prices, probably down to the fact that these banks have non-performing loans in excess of €300bn.
The current market turmoil is likely to see any prospect of a US rate rise deferred further while the final iteration of US Q1 GDP is expected to come in at 1%, up from 0.8%, and US consumer confidence for June set to edge up to 93.2.
EUR/USD – struggling to break above the 200 day MA just above the 1.1100 area 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 – appears to have found some support around the 1.3120 area, another 30 year low. 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 – finding some resistance at 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. Support comes in at 0.8120, and the April highs.
USD/JPY – the US dollar slid lower last week through the 103.50 support before rebounding from the 98.96 area. 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 58 points higher at 6,040
DAX is expected to open 134 points higher at 9,402
CAC40 is expected to open 15 points higher at 4,045
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