The FTSE 100 opened the week on a new all-time high of 7354.14p. Mining stocks (+1.26%) rallied at the London open, following the overnight session’s bullish trend in global mining stocks. Financials (-0.58%) sold off on fears that the 'hard Brexit' could be significantly harmful for business in the City of London. UK banks recently abandoned the idea of EU passporting. The lobbying group, TheCityUK, proposed a form of ‘equivalence’ instead, which has apparently dented investors' appetite in the UK banking sector.
The pound (-1.25%) has been the biggest loser against the greenback, amid Sunday Times reporting that the UK Prime Minister Theresa May would seek a hard Brexit in her speech Tuesday. Basically, May would consider leaving the European Union’s single market as part of her Brexit strategy in order to fight back unwanted immigration.
From a market perspective, a Hard Brexit means a smoggy future for the UK’s businesses across the Channel. The pound markets are pricing in a potentially business unfriendly speech from Theresa May. Cable hit 1.1986 in Asia, while the EUR/GBP jumped to 0.88541 soon after the weekly opening bell. Although cable recovered past 1.20 as London liquidity hit the market, traders remain sellers of the pound. Downside risks prevail as a hard Brexit rhetoric could send the GBP/USD down to October 7th flash crash lows (1.1825) and encourage a further rise in the euro’s value towards the £0.90 level, which was last seen on November 8th, before the US presidential election.
The GBP/USD risk reversals plunged by nearly 20%, hinting that investors are aggressively hedging against further weakness in the pound.
The 10-year Gilt yield surged above 1.30% on the back of higher Brexit risks to the UK’s economic activity and financial stability.
The probability of rate action from the Bank of England (BoE) is very low through the first half of 2017. Markets assess no probability for a rate cut in H1 2017, while the likelihood of a rate hike is only 10% by June. However, there are talks that the BoE could abruptly halt its asset purchases programme in order to temper the rise in inflationary pressures due to the significant decline in sterling.
USD/JPY plunged to 113.63
The net speculative short positions in yen futures decreased for the first time since October, as US 10-year yields traded below 2.40% and the futures hinted at a further deterioration in US yields.
The USD/JPY plunged to 113.63, as the MACD turned bearish for the first time since the beginning of October 2016. Breaking below 113.75 (January 11th low) should encourage a deeper sell-off towards the critical mid-term support of 111.95 (major 38.2% retracement on November 8th to December 14th rally), below which the pair would step in the mid-term bearish consolidation zone.
The US markets will be closed today due to Martin Luther King Day.