Look beyond the index

June 30, 2016

As always, the FTSE 100 acts an illusory indicator of the UK economy. The fact is that it has recovered all of the losses seen in the wake of Brexit. Happy days I hear you say. The fact also remains that it’s, to a fair degree, a measure of how companies are doing that dig lots of stuff out of the ground and sell it in dollars. Oil companies make up 3 of the top six constituents and they have been flying because of the currency moves, up around 10% since the vote. So the FTSE move is to a fair degree determined by the negative currency reaction and not because of the positive impact on the economy via competitiveness effects. The message from those stocks not dependent on digging, dollars or predominantly overseas markets is a lot more mixed. Banks remain a lot weaker, dented by the uncertainty related to financial services, especially with France biting at the heels of the euro clearing market. Domestic housebuilders remain on the floor, Persimmon down nearly one-third, with Easyjet down by a similar amount.

We’re seeing a steady to softer open in equities this morning, whilst currencies have shaken off the early better tone as the off-short yuan takes a fresh leg lower. This has come after some wire reports suggesting the PBOC are willing to let the yuan weaken to the 6.8 level on USDCNH this year. The early rally in sterling has been tempered by this move, with the Aussie also knocked lower. Note that the Bank of England Governor is due to speak at 14:00 GMT in the UK at the BoE on the impact of Brexit on the economy. Should be an interesting one…

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