UK and Europe
European shares rose on Wednesday, unwinding two days of declines as economic data and a Bank of England survey showed no evidence of Brexit-induced economic fallout.
Data showing the lowest rate of unemployment in the UK since 2005 and the Bank of England concluding there is “no evidence of a sharp slowing of activity” reduces the chance of a significant easing of monetary policy in August. The BOE has heavily hinted at action in August so instead of leaving markets empty handed, it may just do something a little smaller. Cutting rates and more quantitative easing could be replaced with something more modest like a revamped ‘funding for lending’ scheme.
Reduced scope for monetary stimulus has scuppered gains on the FTSE 100, which underperformed other European stock averages. The rise on the UK benchmark was led by TalkTalk but gains were capped by a drop in Anglo American (LON:AAL) and other mining shares after the company lowered its annual production guidance.
Airlines IAG (LON:ICAG) and Easyjet (LON:EZJ) shares dipped after budget carrier rival Wizz Air (LON:WIZZ) said it was halving intended second half growth to the UK because of the weaker British pound and diverting it to other routes. The slump in the pound is naturally creating a new set of winners and losers in British industry. The UK’s domestic airlines would naturally prefer a stronger pound to encourage Brits travelling abroad with more foreign money in their pockets. IAG is a bit more insulated since the lower pound should also generate more tourists coming to Britain on British Airways and Iberia flights.
US
US stocks saw modest gains on the open with Nasdaq leading the charge encouraged by stronger earnings from Microsoft (NASDAQ:MSFT), one of the index’s largest components. With the Dow Jones targeting its ninth winning day on the trot, markets are looking pretty overbought.
Microsoft’s cloud business is going from strength to strength, offsetting the tech company’s attachment to the declining PC market.
Morgan Stanley (NYSE:MS) shares rose after it continued a Q2 trend of falling bank revenues but topped earnings estimates.
FX
The British pound gained on Wednesday after a positive labour market data surprise coupled with the Bank of England saying it sees “no evidence of a sharp slowing of activity” to reduce expectations of a rate cut in August.
UK unemployment fell to 4.9%, the lowest since 2005 while average earnings excluding bonuses rose at a slightly slower pace of 2.2% m/m versus 2.3% expected. The claimant count rose by 400, less than the 3.5k expected but nonetheless the fourth monthly rise.
The ONS was careful to point out that data was collected before the vote was known, but it now seems undeniable that there was no material slowdown in economic activity as a result of uncertainty before the referendum. The question that remains unanswered is whether the economy has begun to slow afterwards. Still, based on available data, the Bank of England has scant evidence to justify a big easing of monetary policy. Retail sales on Thursday will be the next test.
Commodities
The dollar index sitting near a four-month high has caused a broad slide in commodities on Wednesday with gold, silver and copper all lower. Oil reversed earlier losses as US inventories data showed a draw of -2.3M barrels.
A recent improvement in US economic data is seeing traders scale back expectations that the Fed will put off raising rates this year. With Brexit fears subsiding, the Fed has just lost another reason not to hike rates at either its July or September meeting.
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