15 June, 2016
As German bund yields joined Japanese 10 year yields in sliding into negative territory yesterday the effect on banking stocks in particular continues to take its toll, sending stock markets lower for the fourth day in a row, and knocking £100bn off the FTSE100 at the same time.
Banking stocks have continued to be the soft underbelly of a fragile European recovery and this continues to be borne out by new record lows in Italian banks, as well as Swiss banks UBS and Credit Suisse, but also in the form of renewed concerns about the resilience of Germany’s Deutsche Bank as the share price moves to within touching distance of its all-time lows seen earlier this year.
While price pressures in the UK and the US appear to be showing signs of reviving, there is no such expectation in Europe with Eurozone inflation expectations nose diving even further as the key 5 year/5 year gauge of inflation expectations fell to a new all-time low yesterday.
For all the ECB’s efforts there is a concern that Europe could be about to repeat the Japanese experience and fall into a prolonged period of sliding yields and falling inflation, and for pretty much the same reason.
It was Japan’s failure to deal decisively with its own banking crisis in the early 1990’s that sowed the seeds of its current malaise and it would appear that Europe may be about to repeat the same mistake. Even if history isn’t repeating itself exactly here it sure is singing a similar tune.
Given these concerns and a fragile global economy the last thing investors needed was further “Brexit” angst but the continued flow of opinion polls pointing to a possible “leave” outcome has caused a further reassessment of risk profiling with respect to the outcome of next week’s vote.
This risk is likely to be at the forefront of today’s FOMC rate meeting where US officials look set to keep rates on hold and present the latest projections and rate plots for the US economy.
Fed President Janet Yellen’s biggest problem now is trying to reorientate market expectations about not only the potential rate path for this year, but also the US economy as well. Yesterday’s US retail sales numbers for May did come in better than expected at 0.5%, but they were still lower than April’s 1.3% rise. Market expectations for a rate rise this year is currently less than 50% and yet only three weeks ago Fed officials were talking up the prospect of 2-3 rate rises by the end of this year.
This now looks wildly optimistic yet the Fed will be reluctant to let the markets think that the prospect of rise isn’t possible this year, so will be keen to reset expectations, while not being wildly hawkish either at a time when the US dollar is surging and stocks are weak.
Before that however we will be getting another snapshot of the UK economy, in the form of the latest unemployment and wages data. Even though rate expectations for an interest rate rise have nosedived the UK economy is still growing albeit at a much slower rate than a few months ago.
ILO unemployment for April is expected to come in unchanged at 5.1%, while average earnings excluding bonuses is expected to come in at 2%, slightly below March’s 2.1%. The new living wage increases should start to come into the numbers here providing a nice boost at a time when inflation remains low.
Also today Chancellor George Osborne will look to warn of the risks of large scale tax rises and an emergency budget in the event of a “leave” vote along with previous Labour chancellor Alistair Darling as the “remain” camp resorts to further somewhat desperate tactics to try and arrest the slide in the opinion polls towards the “leave” camp. The reality is given the slowdown being seen in the UK economy already, further tax rises are likely to arrive whatever the outcome, due to the fact that the Chancellor is unlikely to meet his budget targets by the end of this parliament.
EURUSD – continues to look soft drifting towards a potential retest back towards the 200 day MA at 1.1090, and trend line support from the December lows. We have interim resistance at 1.1320.
GBPUSD – the pressure remains on the downside while below the May lows at 1.4330 with the April lows at 1.4010, and the lows this year at 1.3835, coming into focus. Sentiment has turned bearish and we need to see a move back through 1.4400 to stabilise.
EURGBP – is finding it difficult to gain momentum towards the 0.8000 area which means we remain susceptible to a slide back below the 0.7930 level and 200 week MA. A break through the 0.8000 level could see the April highs at 0.8120. A fall back below 0.7900 suggests a return to 0.7760.
USDJPY – the US dollar is finding support around the 105.50 area and remains at risk of falling below the 200 week MA. A close below this level opens up the potential for a move towards 100.70 and the 2014 lows. We need a recovery through the 107.70 area to help stabilise.
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