Europe
Does anyone remember when financial markets used to be just about the economics, and the politics tended to take care of itself?
The last few years have changed that for good as we now have to delve in to the cess pool of politics, and today’s bombshell from Boris Johnson that he wouldn’t join the running to become Conservative party leader, and Prime Minister was one of those drop the mic and “Boom” moments, which actually prompted a small rebound in the pound. This surprise withdrawal more or less clears the way for Theresa May to position herself as a unifying candidate given her low profile throughout the campaign.
Her position as a reluctant “remainer” may not go down well with the more ardent Brexiteers but her scepticism could well be enough to see her as an acceptable choice to the other candidates, and certainly her reputation as a safe pair of hands appears to have been received fairly well by the markets.
As we come to the end of the month and the end of Q2 any hope that the uncertainty that we were concerned about at the beginning of the month would have dissipated in the wake of this month’s event risk has been quickly disavowed.
While the FTSE100 looks set to finish the month and the quarter higher, and its highest levels this year, this can be largely put down to a weaker pound, as well as the rebound in commodity prices. In stark contrast the FTSE 250 has finished both the month and quarter lower, along with every other European index, as concerns about an economic slowdown and geopolitics weigh on sentiment.
This divergence isn’t difficult to explain given the rebound seen in commodity prices which have helped put a floor under the mining and oil and gas sector stocks, which have also done well. The worst performers have been the banks nobbled by the prospect of lower rates for longer, at a time when the UK economy could well have stalled in Q2.
European banks are in even worse shape than there UK counterparts, in most cases trading at record lows as concerns about even more negative rates and a slowing economy weigh on their profitability an interest margins. Royal Bank of Scotland (LON:RBS) is amongst the worst performers on the FTSE100.
Italian banks in particular remain a cause for concern particularly given that German Chancellor Angela Merkel ruled out the prospect of allowing the Italian government to pump tens of millions of euros into the banking system to help stabilise it. Under current EU state aid rules any attempts to help banks must involve a bail-in process that doesn’t involve using tax payer’s money. Italian PM Matteo Renzi has tried to argue that the Brexit uncertainty has destabilised Italy’s already fragile banks. The reality is the problems of Italy’s banks predate last week’s Brexit vote, and he knows it.
The best performers today have been basic resource stocks led by Antofagasta (LON:ANTO) and Anglo American (LON:AAL) while house builders have continued to come under pressure over concerns that a slowing UK economy will dampen the prospects for new projects.
US
US markets drifted into the end of the month and quarter pretty much unchanged from where they started, even though they have been buffeted by the various changing headwinds of politics over the course of the past few weeks.
Today’s economic data pointed to a strong rebound in the latest Chicago manufacturing PMI for June coming in at 56.8, which was well above expectations. In a more worrying development the employment component shrank at a faster pace in June, reinforcing concerns about a slowing jobs market.
US banks are likely to be in focus today after last night’s publication of the latest stress tests with particular attention on Morgan Stanley (NYSE:MS) who were asked to come back with a fresh plan by the end of the year.
FX
Earlier this year stock markets sold off on reports that China was looking at a sharp devaluation of the yuan in an attempt to try and reinvigorate their stuttering economy. With the yuan back at the same levels against the US dollar these reports have resurfaced and in the process knocked the Australian dollar sharply lower. With the latest China manufacturing PMI numbers due out tomorrow any further weakness here could well give added weight to that speculation.
The Canadian dollar has also slid back sharply on the back of weaker oil prices.
The pound looks set to finish its worst month since 2009 with a 7% decline against the US dollar and a 9% decline on its trade weighted index to finish at its lowest levels since 2013. It still remains above its 2013 lows at 78.80 on a trade weighted basis, however there is plenty of speculation it could fall further, particularly against the US dollar.
Commodities
The rebound in oil prices in the last couple of days has taken a knock after reports suggested that a Nigerian ceasefire could well with the effect that we could see slightly higher output. While we remain below the highs of the month oil prices have managed to post their best quarter since Q2 2009, however with OPEC oil output at record highs, we’ve seen some selling interest kick in due to concerns about a slowing global economy.
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