Morning Report: 1 July 2016

1st July 2016 By: Ranko Berich

GBP Sterling took a big step downwards yesterday as Bank of England Governor Mark Carney strongly suggested that rate cuts could be on the horizon for the British Economy. In his second appearance since the Brexit vote, Carney sought to reassure investors and consumers that the BoE was monitoring developments closely and was well equipped to prevent any financial instability. Monetary policy was not a panacea, and could not completely offset any potential negative effects on growth, jobs, or wages, Carney was careful to add. The Governor also pushed back strongly against suggestions that his position may become untenable if Pro-Brexit politicians that have previously criticised them became senior cabinet members. Equities were already rallying before Carney’s speech, and have extended their gains since then, with crude oil also holding up well. News that the UK’s Current Account deficit had risen to 6.9% of Gross Domestic Product had little effect on sterling when the data was released in the morning, alongside revised Business Investment data, which showed investment falling 0.6% in the first quarter, while the index of services rose 0.5%. This morning’s data has included Manufacturing Purchasing Managers Index data from Markit, which showed reported activity growing in the sector, although the survey was taken before last week’s referendum.

EUR The euro made further inroads against sterling yesterday, and managed to quickly recover most of the losses it saw during the afternoon against USD. Reports emerged that the European Central Bank was running out of eligible bonds to buy as part of its quantitative easing programme. The ECB is subject to self-imposed limits on the types of bonds it can buy, most notably due to a ban on buying assets yielding less than its benchmark deposit rates. The reports suggest that the ECB may be considering widening its asset purchase remit, a decision that could cause further euro weakness. Yesterday’s data releases included the first estimate of eurozone Consumer Price Index inflation in June, which was reckoned to have risen 0.1% over the course of the month, erasing last month’s fall. This morning’s data has largely consisted of survey based Purchasing Managers Indices for the manufacturing sector, which generally showed expansion in the sector across Europe, with the exception of France.

USD USD had a surge of strength against the euro yesterday afternoon that quickly faded, but the greenback did make progress against sterling. Yesterday was a slow day data wise, although weekly Unemployment Claims rose slightly, to 268,000, and the survey based Chicago Purchasing Managers Index rose to 56.8, indicating rapid expansion in activity reported by the surveyed businesses. Today will see more survey data released, in the form of Manufacturing PMIs from Markit at 14:45 BST and ISM at 15:00. Construction spending and ISM Manufacturing Prices will be released at 15:00, and Vehicle Sales data will be released throughout the day.

CAD USDCAD has been trending downwards this week, and despite some intraday volatility, yesterday was no exception. Crude oil prices have recovered strongly this week, and the Brent benchmark closes the second quarter some 77% up from January’s lows. Monthly Gross Domestic Product growth data showed the economy growing at 0.1% over the course of April, while the Raw Materials Price Index reflected the broad rally seen in crude oil and other commodities, rising 6.7% in May. Today is Canada day and no data will be released, so loonie is likely to continue to trade in line with crude oil prices.

UK News

  • Financial Times. Carney prepares for ‘economic post-traumatic stress’. Bank hints at more easing as sterling falls and gilts go negative. The Bank of England is preparing to unleash another round of monetary stimulus as it battles to contain the economic fallout of The UK’s decision to leave EU.
  • Financial Times. Bond yields fall to new record lows led by UK Gilts. US Treasury 10-year yield approaches its all-time low from July 2012. Leading government bond markets began the second half of the year extending their record-setting run, led by the UK and Japan, while the US Treasury benchmark yield also approached a fresh all-time low.
  • Reuters. UK manufacturing growth hit five-month high before EU vote – PMI. British manufacturing expanded at the fastest pace in five months in June before Britons voted to leave the European Union last week, according to a survey conducted almost entirely before the historic referendum.
  • Reuters. UK current account gap remained near record high before EU vote. Britain’s current account deficit remained near an all-time high in early 2016, official data showed on Thursday, highlighting its reliance on foreign financing and the risk of more pressure on its currency after it voted to leave the European Union.