Sliding bond yields, growth concerns and more opinion polls showing the “leave” camp solidifying their lead in the polls ahead of next weeks “Brexit” vote saw both European and US markets fall sharply at the end of last week, and these concerns look set to translate into a weaker open at the beginning of this week.
The initial opinion poll in question at the end of last week gave the UK leave campaign a 55-45 lead, its biggest lead yet of the whole campaign, causing the pound to drop sharply in turn exacerbating the broader market sell-off into the US close.
It would appear that the continued hyperbole of both campaigns, along with the daily dose of claims of financial apocalypse appear to be getting tuned out as voters tire of the slow drip of absurd claims by various politicians from both sides, of the debate. This hasn’t stopped the hyperbole, with the latest intervention from the Prime Minister David Cameron, on UK pensions, being described as “vote to leave and the puppy gets its” type of tactics.
This shift in sentiment away from the complacency just over two weeks ago when it was widely expected that the “remain” camp would probably carry the day, has spooked already anxious markets, already concerned about further slowdowns in global economic growth particularly in light of recent weak economic data out the US, China and Japan.
A slightly softer session yesterday for Europe’s markets, though the FTSE100 once again outperformed as oil prices continued to make headway gaining a foothold above the $50 a barrel level and closing at 10 month highs.
While oil inventories still remain at elevated levels continued supply disruptions in Nigeria, have sent output to a 20 year low and this is helping underpin prices. The third successive weekly draw in a row has also helped sustain the uptrend for oil prices which has been in place now for nearly 5 months.
With the US dollar also on the weak side there appears to be little in the way to stop the upward momentum behind the move higher in the oil price.
This US dollar weakness has also had another positive side effect, pushing US markets back close to their all-time highs, as the prospect of a US rate rise gets pushed further out towards the end of the year.
Concerns about the Chinese economy also weighed on sentiment after disappointing trade data while there still appears to be no signs of any significant pick up in inflationary pressures either as the latest May CPI data slipped back to 2%, while factory gate prices declined 2.8%. A slightly weaker CPI number reflected a lower than expected rise in food prices as evidence grows that the recent stimulus efforts of Chinese policymakers may well be wearing off.
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How quickly markets forget as after a poor start at the beginning of May due to weak manufacturing data from China, the UK as well as the US, downgraded forecasts for UK and Eurozone growth, and weak investment bank earnings saw markets slide back sharply.
As we head into June all those woes appear to be forgotten as we look towards not only a big week for event risk but also a big month, as we look towards a raft of economic announcements, an OPEC meeting, an ECB meeting and the US employment report this week.
US markets continued to go from strength to strength last week posting their best week since March, despite speculation that the Federal Reserve might be on the cusp of another rate rise.
Last week’s minor upgrade to US Q1 GDP along with some improvement in some of the headline data doesn’t appear to have shaken investors out of their ambivalence to the prospect of a US rate rise in June. If anything remarks made by Federal Reserve Chair Janet Yellen would appear to have reinforced that lack of expectation given her comments that a rate rise might be appropriate in the coming months. At first glance it could be argued that these remarks could be construed as “hawkish”, but they aren’t anywhere near the sort of tone we’ve heard in recent weeks from various non-voting members of the FOMC, though James Bullard of the St. Louis Fed did suggest that markets were “well prepared” for a hike fairly soon in remarks made yesterday.