Global stocks and sterling bounce after Brexit bashing

Reuters: Share markets climbed on Thursday as upbeat US economic data took some of the sting out of the Brexit scare, while the Australian dollar dipped as the country’s triple A credit rating came under threat.

The European market started firmer with the FTSE up 1.7%, the CAC in Paris 1.9% higher and Germany’s DAX rising 1.3%. US S&P futures pointed to a 0.2% bounce.

In the currency market, Brexit-battered sterling also steadied at $1.2980, while the Aussie dollar fell as low as $0.7467 after Standard & Poor’s cut the country’s rating outlook to negative from stable, citing a need for fiscal repair.

The agency had warned it may act after inconclusive elections over the weekend suggested the next government would have a hard time getting reforms through to law.

However, investors are less sensitive to ratings these days given so many countries were downgraded in the wake of the global financial crisis and the Aussie soon steadied at $0.7511.

Likewise, Australian bond futures barely budged as 10-year yields of 1.88% make the debt highly attractive compared to the negative yields of some of its peers.

Italy led a move higher in southern European bond yields meanwhile as the rising popularity of the anti-establishment 5-Star Movement (M5S) and concerns about a banking sector saddled with bad debts rattled investors.

Polls showed this week that the M5S – which has called for a referendum on euro zone membership and triumphed in local elections last month – is now Italy’s most popular party, ahead of Prime Minister Matteo Renzi’s Democrats.

Italian 10-year bond yields rose three basis points to 1.20%, pulling away from the German benchmark which was flat at minus 0.17%.

“It all circles around Renzi being able to win this referendum, with these legacy problems in the banks also coming back to haunt Italy,” Commerzbank strategist David Schnautz said.

Resilient

Earlier in Asia, the mood had been one of relief that Brexit fears had faded for the moment. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.8%.

Japanese shares were restrained by a strong yen and the Nikkei slipped 0.9%.

Still, it was notable that while bond markets have been signalling recession, equities had stayed fairly resilient.

“The most optimistic interpretation is that markets believe a limited regional shock is going to result in a significantly easier stance for global monetary policy,” David Hensley, an economist at JPMorgan, said in a note.

“At ground zero, the Bank of England has indicated it may soon cut rates. There is widespread speculation the BOJ and ECB will ease, a view we share.”

More importantly, JPMorgan believes the Bank of England will revive its quantitative easing process while the British government reverses course on austerity and loosens fiscal policy, which could be a green light to fiscal expansion globally.

No Fed hike until 2019?

Sentiment got a welcome lift from a survey showing activity in the giant US service sector hit a seven-month high in June as new orders surged and companies hired more.

That helped the Dow rise 0.44%, while the S&P 500 gained 0.54% and the Nasdaq 0.75%.

Minutes from the US Federal Reserve’s June policy meeting confirmed what was already suspected – that officials were concerned ahead of the Brexit vote, which subsequently erased $3 trillion from global equities over two days.

The British pound remained vulnerable at $1.2975, having slid almost 3% in the previous two sessions to carve out a 31-year trough of $1.2898.

The safe-haven yen was well bid at 100.73 per US dollar, while the euro held steady at $1.1090.

Markets have assumed the uncertainty over Brexit, and the resulting strength in the US dollar, has made it very unlikely the Fed will be able to hike rates again this year.

Fed fund futures for December imply a rate of 38.5 basis points, almost exactly where the effective rate is now. Remarkably, the market is not fully priced for a hike until the start of 2019.

Treasuries have in turn enjoyed an historic rally that has taken yields to record lows right out to 30 years. The benchmark 10-year note was paying just 1.37%, some way below the rate of US inflation.

Indeed, analysts estimate over $10 trillion of government debt around the world offer only negative yields, a nightmare for fund managers and insurance companies who have committed to future pension payments at positive rates.

In commodity markets, oil prices recouped some lost ground on the better US data and expectations for a sharp drop in crude stockpiles.

NYMEX crude futures were quoted 25 cents firmer at $47.68 a barrel, while Brent added 23 cents to $49.03.