This week started with a big question mark. Was the despair over Brexit going to lighten, resulting in a weaker dollar, weaker yen, weaker gold, and weaker bond prices? The jury is still out, but the markets certainly aren’t giving up easily. The USD/JPY pair dipped below 100; gold made a new post-Brexit high; and the bonds made new historical lows. Negative interest rates can be found all over the globe. (Lend me a thousand dollars and I will pay you back $990 in two years. Sounds right, doesn’t it?).
Wednesday, the FOMC Minutes from the last meeting came out. Federal Reserve policymakers decided in June that interest rate hikes should stay on hold until they have a handle on the consequences of Britain’s vote on EU membership.
What’s ahead?
It is clear that the FOMC will not be in a position to increase its fed funds rate in the near future. The question is: will they actually cut rates in the near future? On Friday, the US employment numbers will be released, and that will give us a hint regarding the strength of the US economy.
In the UK, a Reuter’s poll of 52 economists said the bank rate would remain steady at next week’s meeting (which concludes on July 14), and that the Bank of England will probably wait until August to make any policy move to offset the Brexit jolt to their economy.
In the Markets
Crude oil prices have suffered due to risk aversion. Crude oil is down about $4.00 from Friday’s close. The crude inventory numbers which were delayed because of the Fourth of July holiday, were released yesterday. US government data showed a smaller-than-expected weekly decline in crude oil inventories. On the other hand, US natural gas futures were up on Thursday, after data showed that natural gas supplies in storage in the US rose less than expected last week.
Global stock index futures tanked after the Brexit vote. However, after only a few days, prices quickly rallied. In fact the UK FTSE did not just recover, but it was able to make a 10-month high, though it gave up a lot of its gains this week. The rally was based on expectations that the Bank of England would offer a new stimulus package for its economy.
The British pound dropped to a 31-year low against the US dollar on Wednesday. Many expect the pound will only find support at the 125 level because of the anticipated cut in interest rates, though a “bottom picker” would find value below 130.
Sugar prices rallied to a new 3 1/2-year high as sugar supplies tightened due to heavy rains in Brazil’s cane growing region, with sugar production falling according to Unica, Brazil’s sugarcane association. In this week’s trading, prices have corrected smartly as a result of profit taking.
Tesla (NASDAQ:TSLA) was hit with assorted bad news this week. First, it missed its second quarter target for vehicles delivered and it is expected to fall short of its annual target. This questions Tesla’s ability to morph into a mainstream contender. Furthermore, it reported a fatality in one of its cars while using the self-driving autopilot mode. Investors also questioned its bid to buy SolarCity, a solar power company.