Double ratings downgrade hits UK

28 June, 2016

It’s been a torrid few days for equity markets and the pound in particular as it continues to plumb new multi-year lows against the US dollar, though we could get some respite today.

With politicians seemingly intent on making a laughing stock of the UK, with the Labour opposition tearing itself apart, and the Conservative government still debating as to what to do next, the ratings agencies decided to rub salt in the wounds by announcing a raft of downgrades.

Standard and Poor’s removed the UK’s last remaining triple A sovereign rating by two notches to AA citing political uncertainty, constitutional risk and a less predictable and stable policy outlook. Soon after Fitch followed suit also downgrading the rating to AA, citing a “less predictable, stable and effective policy framework.”

While this would have mattered a lot a few years ago, the loss of confidence in the ratings agencies since the credit crisis saw the announcement barely cause a ripple in the markets. As if to reinforce that point UK gilt yields hit new all-time lows below 1%.

Later today Prime Minister David Cameron will be heading to Brussels to attend a meeting of EU leaders in the wake of last week’s vote and while his reception is probably likely to be chilly, there will probably also be some light hearted mentions of last night’s embarrassment on the football fields of France, as England lost to Iceland. Yesterday the Prime Minister announced he would not be triggering Article 50 of the Lisbon Treaty, and also ruled out the prospect of another referendum. Given the poisonous nature of the last one, that may be no bad thing.

On the other side the EU issued a warning that talks on future relations could not begin until the request had been lodged in what could well turn out to be a cross channel staring contest.

Meanwhile the banking sector has continued to get pummelled, and while UK banks are perceived to be more resilient, banks in Europe are anything but, though RBS is back near levels last seen in 2009. Fears about further interest rate reductions are raising concerns about future profitability, while EU passporting concerns are also a worry.

Deutsche Bank has once again hit new record lows while Italian banks have also remained under pressure, with Unicredit, Monti Dei Paschi and Popolare all down heavily at new all-time lows, as concerns about the huge amount of non-performing loans prompt new concerns about their solvency.

Reports that the Italian government is weighing up measures that could add up to €40bn into Italian lenders weren’t enough to support the share prices, probably down to the fact that these banks have non-performing loans in excess of €300bn.

The current market turmoil is likely to see any prospect of a US rate rise deferred further while the final iteration of US Q1 GDP is expected to come in at 1%, up from 0.8%, and US consumer confidence for June set to edge up to 93.2.  

EURUSD – struggling to break above the 200 day MA just above the 1.1100 area keeps the pressure on the downside 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 – appears to have found some support around the 1.3120 area, another 30 year low. To stabilise and mitigate the risk of a move below 1.3000 towards 1.2800 we need to see a move back through the 1.3650 area.

EURGBP – finding some resistance at 0.8370 area the 2014 highs as well as the 50% retracement of the move from the 2008 highs at 0.9802 to the 2015 lows at 0.6934. A move through here could well see a move towards 0.8706. Support comes in at 0.8120, and the April highs.

USDJPY – the US dollar slid lower last week through the 103.50 support 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.

Banking sector remains a worry1 Jul, 2016  

In an absolutely stunning four day turnaround the FTSE100 has managed to post not only its lowest level in 4 months at the end of last week, but also its best close since April 21st as yesterday the UK main benchmark managed to reclaim all of its post Brexit losses...

Markets stabilise following two days of selling29 Jun, 2016  

Equity markets embraced the first rebound on Tuesday after two days of selling. The FTSE 100 and DAX indices both opened higher, finishing the day with 2.64% and 1.93% gains respectively...

Yellen speech in focus after US payrolls miss6 Jun, 2016  

For most of last week, today speech by Fed chief Janet Yellen was being viewed through a lens of the timing potential for a June rate rise. This was largely down to some large scale expectations management by a raft of Fed officials in the lead up to Fridays May payrolls report...

OPEC meeting in the spotlight2 Jun, 2016  

Asian markets consolidated on the first trading day in June, as uncertainties surrounding the FOMC and Brexit started to dampen market optimism. The Chinese and HK markets both closed marginally lower on Wednesday due to mixed PMI data...

PMI data set to take centre stage23 May, 2016  

Equity markets continued to struggle for direction on both sides of the Atlantic last week, with the Dow posting its fourth negative week in a row and its worst losing streak since 2014, though the S&P500 did manage to eke out a weekly gain...

Equities, commodities and treasuries fall20 May, 2016  

In short, everything was falling as the fear of a June rate hike returned to the market. According to Bloomberg world interest rate probability, the implied chance of a June rate hike has climbed to 32% from 4% over the last two days...