Europe to open lower as UK politics implodes

June 27, 2016

Despite a late recovery from the lows last week, European markets had already looked as if they would open sharply lower this morning, after US markets rolled over and fell sharply into their close on Friday, with the S&P500 hitting a three month low, only hours after posting its highest close of the year.

That was even before the events of the weekend, where investors are now having to contend with the additional turmoil of a political class intent on fighting amongst themselves like ferrets in a sack.

Having had the weekend to absorb the shock of last week’s Brexit vote, markets are now faced with the prospect of even more uncertainty of the breathtaking incompetence of the incumbent government for not having had a contingency plan in place for such a binary outcome as last week’s vote. Asia markets have traded cautiously with the Nikkei finding some support on expectations that the Bank of Japan might look at defending the 100 level in USD/JPY.

The lack of policy planning reflects badly on a UK political class more intent on being right than looking after the best interests of the country, irrespective of the outcome.

With the opposition Labour Party also tearing lumps out of each other in a mass of resignations, the political shock wave looks set to not only reverberate across the UK political landscape, but across Europe as well, in the form of rising discontent about the current status quo.

Already the battle lines are being drawn, with EU leaders urging the UK to get on with triggering Article 50 of the Lisbon Treaty, while German Chancellor Angela Merkel appears more cautious, perhaps taking the view that the temperature needs to come down before talking gets under way.

With UK politics now gridlocked it would appear that any triggering of Article 50 could well take time, if it happens at all. Today we look set to hear the first comments from Prime Minister David Cameron since his resignation speech on Friday as he addresses MP’s after a weekend of political turmoil.

We are also set to see the first glimpse of Chancellor George Osborne who has been conspicuous by his absence in recent days, when he makes a speech at 7am later this morning. Let’s hope he is more measured and statesmanlike than he was in some of his pre-referendum pronouncements.

With last Fridays plunge on European markets still fresh in the mind concerns remain about the resilience of the banking sector in particular with Italian and Spanish markets bearing the brunt of Friday’s fallout, hitting new record lows in the process.

Spain also went to the polls yesterday in a rerun of last December’s deadlocked election, and once again it looks as if Mariano Rajoy’s party is the largest party, however again he has come up short of an overall majority, which suggests we can expect further political deadlock.

EURUSD – the break of trend line support from the December lows and the 200 day MA just above the 1.1100 area has seen the euro ratchet lower and could well see a move towards the March lows at 1.0825. To stabilise we need to see a move back above the 1.1250 area.

GBPUSD – the pound posted a 30 year low at 1.3228 last week within hours of posting a 1.5018 high. While we managed a rebound back to 1.4000, the pound has continued to come under pressure this morning after closing at 1.3650 at the end of last week. A retest of 1.3200 and subsequent break could well see a move towards 1.2800.

EURGBP – the euro made a two year high last week at 0.8315 before slipping back slightly, though it still managed to close above its April highs of 0.8120. This sharp move higher could well see another retest of last week’s high, however we remain vulnerable to the 0.8000 area.

USDJPY – the US dollar blasted lower, through the 103.50 support area before rebounding from the 98.96 area. We need to get back through the 103.50 area to retest the 105.50 area. A move below 100.00 is likely to prompt the risk of further losses and possible BoJ intervention concerns.

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