GBP extends declines

July 6, 2016

The AUD declines as energy market retreats paying no attention to the positive AUD Aig Performance of Service Index, the drop is accelerated by weak Retail Sales (0.2% vs. 0.3% expected) and Trade Balance reports (-2210M actual vs -1700 estimated).

The services sector in China rose at a higher pace in June, PMI reports shows with 52.7 headline figure, while Composite PMI showing average of Manufacturing and Services PMI slowed down its growth, signalling that the expansion in services is not yet enough to make up for contractions in the industrial sector. To get a more precise estimate in the efficiency of the economic shift in China, it would be useful to have a look at consistency of the changes in services PMI:

Starting from the January 2016 and taking into account seasonal adjustments the growth in services sector draws a pretty stable upward pattern. This inspires confidence that the Chinese economy regained its footing and may again become attractive for foreign investments, especially in the light of the Brexit crisis looming at large. Large investors are again scrutinizing the Chinese government bonds for potential safety and a recent drop in yields seems to confirm that:

Since the start of June, the yields of 10-Yr government bonds declined by 5%. The 6% upsurge on Shanghai Composite index from the middle of June also reflects investors’ belief that China could be affected by Brexit to a lesser extent than other stock markets.

Meanwhile, the UK issued the Financial Stability report today, sending pound 1% down to the 1.3150 level. The BoE underlined risks related to the drop in investments in Commercial Real Estate (CRE), where foreign capital account for 49% of total investments. The UK regulator also permitted local banks to use reserves known as countercyclical capital buffers (CCyB), lowering CCyB rate to zero, which will help banks release up to 150B pounds to boost lending. It remains unclear how the UK is going to struggle with account deficit issues, which is the main risk for the UK economy.

UK FTSE 100 trades in the green zone, propelled by the weak GBP, though unwinds parts of its gains due to Oil declines. WTI fell by 2.96% on gloomy outlook on the world economy, Brent lost 2.65%, dropping to 48.77 per barrel.

Precious metals extend their gains on increased risk concerns, Gold gained 0.83%, Silver added 1.45%.

USDX index advances by 0.16% to 95.76.

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