- Euro Stoxx 50 2703 -73
- FTSE 5958 -181
- DAX 9327 -230
- CAC 400 -100
GBP: Anarchy in the UK?
Markets will have had the weekend to digest Friday’s horror selloff, and while we are still expecting a very weak day in Asia, the selling is likely to be more strategic, with possibly even some buying in certain stocks that tend to outperform in downturns.
Low-beta sectors such as utilities and telecommunications would be the most likely places to see buying if investors are not still going to be hiding in cash. Telstra actually closed in positive territory on Friday.
Investors are now expecting further easing from most of the major central banks, and this has driven strong buying in the safest sectors of the bond market.
Market pricing for an RBA rate cut in August lifted to 60% on Friday, expectations for a rate hike by the Fed in 2016 have completely disappeared, and markets are expecting the BOE to cut to zero and restart asset purchases.
Many are now expecting that the UK economy could go into a technical recession in the second half of 2016 as investment and consumption dry up in the post-Brexit uncertainty.
Cable – the GBP/USD – settled down 8.5% on Friday at a 30-year low around US$1.36, but in early trade today the pound has already fallen a further 1.87%. It is very difficult to say what fair value is for the pound is given the very real prospect of Scotland electing to leave, and the real risk that the many years of work that went into the Northern Ireland peace process begin to unravel.
Investors may have been surprised that the FTSE only lost 3.15% on Friday, but in USD terms the loss was 10%. The currency moves were so dramatic on Friday, one kind of has to look at most markets in US dollar terms: FTSE -10.03%, DAX -8.36%, CAC -9.56%, MIB -12.48%, IBEX -12.35%.
The main focus in the Asian session will be Japan. After the USD/JPY dropped 3.7% on Friday, the Nikkei saw a horror selloff of 7.9%, although in USD terms this was trimmed to 4.76%.
Speculation is growing that the Bank of Japan will add an extra 10 billion yen a month to their asset purchasing program to try to stem the strength in the yen. Investors will be watching the yen very closely to see if it begins to move on intervention speculation. The Nikkei is expected to open over 1% higher.
The ASX is looking to open slightly higher as well, and it may actually benefit from the further dearth of yield in the post-Brexit environment, given it has one of the highest dividend yields in the world and is sheltered somewhat from Europe.
Gold miners are set to continue to see further gains, but the rest of the materials and energy sector are in for some trouble as commodity prices were hit hard on Friday. The ASX companies with high UK exposures, such as BT Investment (AX:BTT), Henderson Group (AX:HGG) and Westfield (AX:WFD), could all be in for further difficulties.