Thursday, June 30, 2016

Markets: "Calm Continues, But Rot Below the Surface"

From Marc to Market:
The global capital markets have quieted considerably since the start of the week.  Month and quarter-end considerations appear to be playing a role.  Also, there is a sense it will take some time to sort things out.  Perhaps the biggest surprise is how ill-prepared the leave camp was for its victory.   There was no game plan.  There is no agreement on who should replace Cameron.  The leave camp is in disarray with some of the leaders turning on each other (e.g. Johnson, Gove, Farge). There is even confusion of whether it is the Prime Minister or Parliament that invokes Article 50.   
Sterling is firm.  Short-covering and buying back currency hedges.  The news stream remains poor. Confirmation of Q1 GDP at 0.4% (2.0% year-over-year) has little significance.  However, news of a GBP32.6 bln Q1 current account deficit is notable.  It gives a sense of the UK's funding needs.  Record low interest rates and the unclear policy outlook suggests financing it may prove difficult at these levels.   
Sterling's intraday upticks appear to be running out of steam ahead of $1.3500.  Yesterday's high was near $1.3535, and the Monday's high was set by $1.3565.  Due to the recent wide price swings, there is little in the way of $1.3400-$1.3450, if sterling is going to breakdown.   
The economic data from the eurozone was relatively constructive.  The preliminary June CPI rose to 0.1% from -0.1% in May.  The median guesstimate was for a flat reading.  It was the first positive reading since January.  About half the increase likely comes from energy, as the core rate ticked up to 0.9% from 0.8%.  Service inflation is rising 1.1% year-over-year.   Food prices are up 0.9%, and other good prices have increased by 0.4%.   It does look as if eurozone inflation was bottoming before the Brexit shock hits.   
Separately, Germany reported as expected labor report, but the surprise of the day came from May retail sales.  The 0.9% gain was half again as large as the median forecast (0.6%), and the April series was revised from 0.9% decline to only 0.3% fall.   On the other hand, note that the US branch of the largest German bank failed the Fed's stress test, and the IMF's review warned out the need for German bank reforms.   
European equities are posting small gains.  The Dow Jones Stoxx 600 is up by about 0.25%.  Most sectors are higher, but consumer and health care.  The financials are flat.  In Germany financials are underperforming and within that sector, banks and diversified financials are bearing the brunt.   
The euro has recorded higher lows each day this week and higher highs since Monday.  The pattern remains intact, but the euro lacks much momentum.  Support is seen near $1.1080.  This week's price action after last Friday's big leg down is a potential bearish flag pattern, which we suspect will be exhausted in front of $1.1170....MORE