Market Talk — June 30, 2016

With the exception of the firmer Hang Seng (+1.75%), core Asia was pretty much mooted. The big news today was BREXIT again when Boris Johnson withdrew his name for potential Conservative Leader. This comes on the tail of Michael Gove declaring his willingness to throw his hat in the ring. Markets were firmer (around +0.5%) until lunchtime (UK) or just ahead of US cash markets opening, and then we saw the recent rally halt as nerves appeared yet again.

The euro and GBP were hit back from the highs on this news and the return of uncertainty was enough to stall the rally and reverse recent gains. Oil was trading unchanged but that too was hit and within minutes was 1.5% lower.

Overnight the Fed announced the second look at their CCAR results, which clears US banks to boost payouts (dividends/buybacks). The majority they say are in fine shape but they highlighted two institutions. Deutsche Bank Trust and Santander Holdings USA Inc. missed (as they did last year), despite having adequate capital, their plans still rely on assumptions that “are not reasonable or appropriate” – both banks shares are down around 3% today. Then, Mr. Mark Carney spoke. Expectations of further easing, a concern for the UK’s growth forecast with outlook deteriorating hit GBP from what had been a quiet session. Cable was last seen down 1.5% (1.3225) which is also have a negative impact on oil (-3%) and the euro. This comment forced the risk-off trade and saw a spike into the USD. The DXY was last seen 96.25 (+0.5%) as we saw money flooding into US assets be they stocks, gold, or bonds!

Interestingly, the reaction within the US Treasury market with the curve (2/10) flattening in a bull equity market. 10’s were last seen below the 1.5% mark (1.487%) whilst 2’s closed unchanged at 0.635%; closing the curve 85bp. The demand for European bonds continues regardless with the 10yr Bund last seen at -0.13%, closing the spread at +161.5bp. Italy gave back a little ground closing 1.40% (+3bp), Greece 8.02% (+5bp), Turkey 9.04% (-3bp), Portugal 3.08% (+3bp) and UK Gilt 10yr at 0.98% (+3bp), which is a reverse of earlier bids in light that the BOE will offer more paper during the summer.

Not only is it Friday and the end of the week, it is also the end of the quarter and half-year end. We will be looking at levels extremely closely next week as we approach the first Friday in the month (Non-Farm Payrolls – 180k expected and a 4.8% rate).