Morning Report: 6 July 2016

6th July 2016 By: Ranko Berich

GBP Sterling collapsed again yesterday after a new wave of risk-off sentiment hit the markets following the announcement that a number of UK asset funds halted investors from pulling money out of property focused funds. The Bank of England’s latest Financial Policy Committee press conference and accompanying Financial Stability Report saw Mark Carney and fellow FPC members argue that the Bank was well equipped to prevent a financial crisis resulting from Brexit, despite the substantial economic risks. The prevailing risk-off sentiment intensified overnight, sending sterling to fresh 31-year lows against the US dollar, while safe haven currencies advanced. Theresa May took a comfortable lead in the conservative party’s internal elections to decide who is going to be the new party’s leader and, therefore, the next British Prime Minister. The first ballot showed May won with a final result of 165 votes against the second’s 66 votes for the Energy Minister, Andrea Leadsom. May argued after the result that she is the best candidate to complete a double goal: to unify the Party and to negotiate the best possible deal to leave the EU.

EUR After opening yesterday with a bang, the euro quickly began to weaken against the US dollar, while managing to still make progress against sterling. Research company Markit released Services Purchasing Managers’ Indices for eurozone economies including France, Germany, Italy and Spain. The indices showed the sector expanding in general, with France being the notable exception. Eurozone Retail Sales also expanded a healthy 0.4%. This morning’s major release was the eurozone Retail Purchasing Managers Index, which fell to 48.5, indicating expectations of contraction among the surveyed businesses.

USD The US dollar performed well in general yesterday, but the broad risk-off sentiment that helped USD against EUR and GBP also saw it sell off against the Japanese Yen. Yesterday’s US data was poor, with the IDB Economic Optimism Index falling further into contractionary territory and factory orders falling 1% after a 1.8% gain previously. Influential Federal Reserve policy maker Bill Dudley was on the news wires, with comments about the fact that it was still early days for judging the effects and risks of Brexit. Today is a reasonably big day for US data, with Trade Balance data out at 13:30 BST, followed by Services Purchasing Managers’ Indices from Markit and ISM at 14:45 and 15:00 respectively. Later in the evening, the latest Federal Open Market Committee Meeting Minutes will be released. Considering the Fed appears to have backed well away from previous plans to raise interest rates several times this year, the minutes will be interesting for judging the balance of opinion on the committee.

CAD The loonie suffered during yesterday’s risk off moves, reversing the progress it had made against the USD dollar over the last few sessions. The major crude oil benchmarks plunged to fresh lows for the month. Today’s major data release will be Canada’s Trade Balance, at 13:30 BST.

UK News

  • Reuters. May leads three-horse PM race as Brexit hits pound and property. Home Secretary Theresa May opened up a strong lead on Tuesday in what is now a three-horse race to become Britain’s next prime minister, but the first stage of voting was overshadowed by post-Brexit carnage for property investors and the pound.
  • Financial Times. Aviva promises higher dividends to boost flagging share price. Aviva’s shares, like those in other large insurance groups, have been under pressure this year, falling 27 per cent since January. Much of the fall has come since the UK voted to leave the EU last month. On Tuesday its shares lost almost 4 per cent after Aviva Investors, the group’s asset management unit, stopped clients from taking money out of its property fund, blaming “extraordinary market circumstances”.
  • Financial Times. Services data fuel pessimism on UK economy. Weak PMI survey reinforces expectations of monetary stimulus. Activity in Britain’s dominant service sector stalled in the run-up to the EU referendum, cementing concerns that an economic slowdown has already begun.