The impact of the surprise shock from Britain’s vote to leave the European Union didn’t last long for the equity markets. Although equities went on a roller-coaster ride, most indices managed to recover their post-Brexit vote losses, with S&P 500 ending last week 3.2% higher, the best performance so far this year. UK’s FTSE fared even better, rising 7.2% to post its best performance since December 2011.
On the other end of the spectrum, bond yields continued to sink, sending more than one-third of the developed-market sovereign yield debt into negative territory, which in other words means that investors who hold these bonds into maturity will end up receiving less than what they initially invested.
The only way to explain the tightly correlated moves in bonds and stocks is the markets’ anticipation that their best friends, the central banks, are returning to offer support. Major central banks would either hold monetary policy easy for the rest of the year or add additional stimulus through cutting rates and QE.
The Fed is unlikely to hike rates in 2016, with market participants only seeing a hike coming in 2018. Meanwhile, BoE’s Mark Carney is preparing markets for either a rate cut or an extension of the £375bn bond-buying program, but probably both.
Although Brexit’s aftermath will remain to cast a cloud of doubt over the longer run, the week ahead will see traders shift their attention back to the U.S., as June’s jobs report is expected to show a strong recovery from the surprisingly weak reading of just 38,000 in May, the slowest pace of increase in almost six years. The weakness in labor data for the past two months sparked concerns not only about the strength of the job market in the U.S., but the underlying economy as a whole.
However, most recent U.S. data related to consumers, manufacturing, and services, all show signs of stability, which leads us to believe that May’s shocking NFP number was just a one-off and will probably be revised higher on Friday. June is expected to see 180,000 jobs added to the economy, but we’ll also continue to monitor wages closely as they are no less important than the headline figure.
The Federal Reserve and the European Central Bank will both issue their latest meeting minutes on Thursday, but taking into consideration that the meetings took place prior to the Brexit vote, the minutes’ are not expected to yield any significant impact on financial markets.
Reserve Bank of Australia meets on Tuesday. While we do not expect to see any changes on monetary policy, with the RBA likely to keep the cash rate unchanged at a record low 1.75%, the central bank will likely share its concerns on Brexit, and as usual try to talk down the currency and indicate the potential for further easing in the foreseeable future. However, the imminent risk on the Aussie is more political after the Australian federal election over the weekend threatened to create a hung parliament.
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