Equities
UK FTSE 100 is up 2.6% since my last update and is significantly higher than pre Brexit levels. Why is this?
- A increasing belief that EU countries will not punish the UK for leaving the European bloc as our European counterparts have equally vested interests in trading with the UK.
- A weaker pound makes life easier for UK exporters and for global conglomerates who, although headquartered in the UK, have global earnings which need to be repatriated into Sterling e.g. Shell, BP, Glencore, Rio Tinto Zinc. Those overseas earnings are now worth considerably more in sterling terms.
- The weaker pound also makes UK companies and assets cheaper to purchase for overseas buyers as demonstrated by ARM Holdings, one of the UK’s biggest technology companies, which announced it is being bought by Japan’s Softbank for £24bn ($32bn). That purchase was 12-15% cheaper for Softbank after GBP’s Brexit inspired fall.
- With bonds offering historically low yields, equities paying reasonable dividends look attractive.
Interestingly the FTSE 250 (more representative of the domestic UK economy) has rallied 6.2% in the past two weeks and is only 3% lower than where it was prior to the UK’s vote to leave the EU.
European indices have been even stronger than the FTSE 100 over the last fortnight with the German DAX up 4%.
US Equities have also rallied on the global ‘risk on’ sentiment and encouraging US non-farm payroll numbers (see below).The US stock market, as measured by the S&P 500 index, hit a record high last week. Worth noting that all other major equity markets are still below the peak in the absence of the solid economic drivers found in the US right now.
Foreign Exchange
The pound initially rallied on news that Theresa May was to be the new UK Prime Minister so removing one piece of the considerable uncertainty engulfing the UK right now.
The pound has rallied from USD/GBP 1.28 to 1.34 over the past couple of weeks but is currently in the middle of that range at 1.31.
The US Dollar rallied on US non-farm payroll numbers (see below).
Interest Rates
UK: There was considerable focus and speculation that the Bank of England would cut interest rates from the current 0.50% level given the current UK uncertain outlook but, in the end, the Monetary Policy Committee (MPC) voted 8-1 to leave rates unchanged. However, Bank of England’s chief economist, Andy Haldine warned of significant policy action to come so an interest rate cut remains on the cards.
US: US non-farm payrolls are often seen as a barometer for the wider US economy. June payroll (new jobs) numbers were much higher than anticipated at plus 287,000.This was well received by investors as it shows the US economy was still on track but it also showed the payroll numbers are not so strong as to prompt a rise in US interest rates. Some people refer to this as the ‘goldilocks scenario’ i.e. the economy is neither too ‘hot’ nor ‘cold’. The FOMC (Federal Open Market Committee) members have openly said that they wanted to see the affect of Brexit on the US economy before making changes.
Fixed Income
Investors expect the US Federal Reserve to raise rates at some stage this year which has led to some weakness in US debt markets with yields rising from record lows; remember yields up means prices down. German 10 year bond yields have moved back into positive territory; they have had minus yields for some time.UK debt yields also recovered a little after the Bank of England decided against a rate cut.
Commodities
Commodities have been quieter over the last couple of weeks. Brent crude is back below USD 50 per barrel and has generally traded in a tight range of USD49-USD46 over the past fortnight.
Equities
S&P 500: 2065
Nasdaq: 5050
FTSE 100: 6690
Bonds – 10 Year Government Yields
US 1.56%
EU -0.02%
GB 0.84%
Foreign Exchange
EUR/USD 1.1100 (1 euro buys 1.1100 dollars)
GBP/USD 1.3100 (1 pound buys 1.3100 dollars)
Commodities
OIL: Brent: 47.00 (dollars per barrel)
GOLD: 1320 (dollars per ounce)
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Paul McCormick
