Markets Today: The only way is up

Risk assets had another positive night boosted by the prospects of a new round of stimulus in some major economies and the removal of at least one source of UK political uncertainty.

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Risk assets had another positive night boosted by the prospects of a new round of stimulus in some major economies and the removal of at least one source of UK political uncertainty. The renewed bout of optimism has also been helped by better data releases in recent days.

Global equities had a solid overnight session with both the S&P 500 and Dow Jones setting new record highs. Shares in commodities, energy and transportation companies were the big winners while in Europe the move higher was led by auto and banking shares.

That said, the FTSE100 was one notable exception. The UK equity index ended the day practically unchanged weighed down by the GBP outperformance. Over the past 24hrs the pound has rallied 2.04% against the USD (currently at 1.3251) following the unexpectedly quick resolution to the Conservative party leadership. While now one source of political uncertainty has been removed, helping the Pound outperform, the process and impact from leaving the EU still remains a big unknown. The expected softer data post Brexit has not yet surfaced and as such the Pound still looks likely to come under renewed downward pressure in the not too distant future.

After the GBP, the AUD (1.38%) and NZD (1.18%) are the other two G10 outperformers. The improvement in risk appetite coupled with a rise in commodity prices (Iron ore 6.6% to $59.4) have helped the antipodean currencies outperform with the AUD also buoyed by another solid NAB business survey. The AUD is back above 76c, having been there just before the UK referendum and after trading with a 73 handle overnight, the NZD is currently at 0.7299.

The Yen sits at the bottom of the G10 board, extending its decline by another 1.96% as investors wait for further details on the promised stimulus package by Abe. The steady decline in the Yen overnight has also occurred against a backdrop of a stronger Nikkei and higher US T yields.

Indeed, as the world is seen to be a better place, core global yields drifted higher overnight with soft demand on the 10y US Treasury auction also a factor for the selling pressure in US Treasuries. 10y Bunds ended the day 7bps higher at -0.09% and 10Y UST are currently at 1.5049%, 6bps higher.

Data releases took a back seat overnight, but were mostly better than expected. The NFIB index of small business activity and sentiment rose to a six-month high of 94.5 from 93.8 and while the number of job openings in the JOLTS report dropped sharply to 5,500K, job openings  have remained at an elevated level.

Speaking to parliament, BoE Carney said that the Pound depreciation should help narrow the current account gap and economic adjustment post the UK decision to leave the EU. Fed Bullard was also on the wires and noting that Brexit is likely to have ‘close to zero’ impact on the US and he also reiterated his view for one more hike this year.

In other news, the UK parliament will debate a petition calling for a second EU referendum on Sep 5 after receiving over 4m signatures.

Coming Up

As we are about to press the send button, Fed Kashkari is due to speak on a forum on the state of the economy and the role of the Federal Reserve System. Then at 10:30am RBNZ McDermott speaks on forecasting and the cash rate setting process, but as we learned from the Bank early this week McDermott is not going to give any guidance or discuss the forthcoming cash rate decision.

In Australia this morning we get the July Consumer confidence reading and if recent weekly readings are any guide, consumer confidence has probably remained resilient despite of UK referendum outcome and the ensued uncertainty in Europe.Fed’s Mester speaks at the Australian Business Economists’ Luncheon (12:30 AEST) and half an hour later we get China’s trade balance figures for June.

Bloomberg is currently showing the consensus forecast for exports is at 0.3%yoy while imports are -1.2% (both in Yuan terms).So China’s trade is still expected to remain rather subdued. The June trade balance is seen at $45.65bn almost unchanged from the $49.98 print in the previous month.

In Europe and ahead of its policy meeting tomorrow, the BoE releases its credit conditions and bank liabilities surveys and we also get the Eurozone Industrial production for May.

Fed Kaplan speaks in Houston and th Fed beige book is also due for release along with the US Federal monthly budget.

Last but not least we have the BoC rate decision and our expectation is for the Bank to stand pat. That said, given last week’s weak Canadian employment report and the cloudier global outlook, we would not be surprise to see a less neutral/more dovish tone in the statement.

Overnight

On global stock markets, the S&P 500 was +0.70%. Bond markets saw US 10-years +7.97bp to 1.51%. In commodities, Brent crude oil +4.65% to $48.21, gold-1.7% to $1,334, iron ore +6.6% to $59.38. AUD is at 0.7619 and the range since yesterday 5pm Sydney time is 0.7606 to 0.7657.

Good luck.

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