How is the rest of the financial week shaping up?

Bullish US Jobs Report Beat Back Bears…..

July has been a month of sharp contrasts in the financial world. Following the Brexit referendum, investors couldn’t withdraw their money fast enough from equities markets. There was a rush to save-haven assets such as gold, government bonds, and other fixed-interest-bearing securities. The Brexit pandemonium rocked markets to their very core. Trillions of dollars were erased in the days following the Brexit vote, but markets have steadily recouped those losses.

The big change took place on Friday, 8 July when US jobs data for June 2016 was announced. Consensus forecasts among analysts suggested that 175,000 new jobs would be created in June. This figure was blown away with 287,000 new jobs created. This was the single best performance for non-farm payrolls in 8 months, and it reaffirmed the US’s dominance as a global financial powerhouse. As a result, Wall Street boomed and foreign bourses followed suit.

However, we are still seeing a great degree of concern on the global stage as a result of the Brexit saga. Fears have been allayed to a degree by the appointment of new British Prime Minister Theresa May. The former Home Secretary beat rivals to ascend to the highest office – Prime Minister of the United Kingdom. No elections were held to appoint Theresa May, although there is a degree of unease among opponents, notably Liberal Democrats, that this should have taken place.

Nonetheless, May’s appointment has assisted in stabilizing the United Kingdom’s financial sector by preventing several months’ worth of uncertainty vis-a-vis the next British Prime Minister. The FTSE 250 index rallied accordingly, and a degree of normalcy returned to European markets.

Risk-off turns to risk-on for financial markets on Wall Street and beyond

On Tuesday, 12 July 2016, equities markets breathed a collective sigh of relief as investors and traders ploughed their money back into equities across the board. Wall Street was particularly bullish, given the strong jobs data for June and high expectations moving forward. This was the second day of successive games for Wall Street stocks, in spite of Brexit fears. The global economy appears to be normalizing with British politics coalescing around its new leadership and the GBP rising towards the $1.33 level in the currency market. This is the first time since Independence Day (July 4) that the GBP was at that level, and it is a turning point for the sterling.

There is a growing sense that the fear and dread that was expected post-Brexit may easily be managed and will likely not be as great a concern as analysts expected. Recall that Britain has yet to invoke Article 50 of the Lisbon Treaty. According to leading analysts from investment banks around the world, sentiment is already undergoing a paradigm shift. We can see this in the upbeat movements with indices in Europe, the US and Asia. The black cloud that had descended post-Brexit appears to have lifted and many indices are now ending in the black as opposed to the red. US job creation prospects are strengthening and it is clear now that job growth has not stalled and will likely continue growing for the rest of 2016.

Central Banks Favour QE Policies

When it comes to central bank intervention in the broader economy, widespread moves towards quantitative easing, lower interest rates and intervention in currency markets are the norm. We can expect this period of negative interest rates to continue, putting pressure on the Fed to maintain interest rates at their current level. This also helps listed companies on the Nasdaq composite index, the Dow Jones Industrial Average and the S&P 500 index. Recall that rising interest rates act as a disincentive to investors on equities markets. The lower the rate of interest, the greater the profits and the higher the share price. The Fed’s decision to hold off on hiking rates from the current level of 0.25% – 0.50% has certainly boosted prospects for equities markets.

There was another positive tidbit of news in Asia with Prime Minister Shinzo Abe’s supermajority win in the house election. This makes it unequivocally clear that Abe can enact fiscal policy measures to stimulate economic growth in Japan. This has resulted in improved sentiment on the Nikkei 225 index, and the Japanese yen has retreated away from its relatively strong position at 100:1 to the US dollar. This all bodes well for export-driven profits in Japan.

On Wall Street, the Dow Jones industrial average surged above 18,300 in mid-afternoon trading as it gained 0.76%, the S&P 500 index is trading at 2,154.53, up 0.81% and the Nasdaq composite index gained 0.85% to trade at 5,030.84.

Bucking the Recent Trend in Equities and Commodities Markets

Across the Atlantic, the FTSE 100 index was down marginally by 0.03% at 6,680.69, the Euro Stoxx 50 PR was up 1.67% at 2,933.44, the German DAX index was up 1.33% at 9,964.07, the Ibex 35 index was up 2.42% at 8,506.00 and the CAC 40 index was trading 1.57% higher at 4,331.38. Further afield in Asia, the Nikkei 225 index was up 2.46% or 386.83 points at 16,095.65. The Hang Seng index was 1.65% higher at 21,224.74, up 344.24 points, and the CSI 300 index was up 2.18% or 69.85 points, at 3,273.18.

On the commodities front, we are seeing base metals surging. Copper spiked 2.5% in London towards $4,870 per ton, while Brent crude oil gained 4.9% as it rose towards $48.51 per barrel. But the big news of the day and for the rest of the week is the much improved performance in UK equities and the GBP. The pound which recently reached a 31-year low is now well above 1.32 to the USD and the FTSE 250 index is rallying, reversing 10% declines for the year, as is the FTSE 100 index. We can expect a mood of calm to descend upon markets for the remainder of the week as political and economic indicators favour a risk-on approach.