US Stocks Boosted by Oil as Haven Assets Advance

21 June, 2017

Over the last 24 hours, there were big moves in sterling and oil. Initially, sterling was hit hard by Bank of England Governor Mark Carney’s dovish comments during his Mansion House speech. At his speech, he said that it is not the time to raise rates and mentioned mixed signals on consumer spending, business investment and weak wage growth as well as the high uncertainty around Brexit talks.

The expectations around UK inflation have also started to come down a bit, and even though they are above the BoE’s 2% target, it is apparent that the panic around UK inflation has somewhat decreased. This should give the BoE some room to breathe, too and remain bearish on sterling.

Oil is officially in a bear market due to the rising supplies which offset the OPEC supply cuts. For example, the output from Libya, which is not part of the OPEC agreement, has seen a steady rise while oil stored on tankers hit a high for the year. In addition, the number of oil rigs in the US has greatly increased over the last weeks, which is the longest string in 30 years.

These lower oil prices have affected commodity prices and emerging market currencies in general and with an increased risk aversion, equity prices went down almost across the board in Asia and, of course, the safe haven currencies JPY and CHF rallied.

The focus today will be on the UK again. Public sector borrowing will show the stance of fiscal policy. Chancellor Hammond has declined the plans of his precursor to balance the budget by 2020 and pushed them to “the middle of the next decade”. This is a very vague promise on his behalf, that as it appears, will be basically ignored.

It seems that borrowing is already rising and Prime Minister May assured more spending to go against the attraction of Jeremy Corbyn, the Labour Leader, who has surprisingly good results at the recent election by promising, among other things, free university tuition.

The Queen’s Speech, which will be delivered during the formal opening of the new session of Parliament is expected to be more controversial than usual. In fact, the government in power writes the speech and the Queen only delivers the speech and several days after the speech (on 28 June this year), the parliament has to vote on it. If this does not pass, this means that the parliament has no confidence in the government in power and Labour will be asked to form a government instead.
Right now, Theresa May has not reached an agreement with the DUP (Democratic Unionist Party of Northern Ireland) yet and if this is not accomplished the speech might be delayed. Nonetheless, in case the conservatives will be a minority government, this means that the government in power will be weak and this will result in a bad negotiating position during the Brexit negotiations.

Existing US home sales might be more important to look at right now due to the recent data that has shown signs of weaknesses. Some of the reasons why the figures did not meet expectations for the fourth month in a row are due to the unexpectedly wet weather, a natural decline and a shortage of construction workers which has affected production. On the other hand, the indicators for housing demand remain solid and, therefore, if the figures of sales of existing homes continues to weaken then this might affect the economy as a whole. This will make it more difficult for the Fed to raise interest rates further and ultimately affecting negatively the USD.

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