Global Equities Lower As S&P Downgrades U.K. Credit Rating, British Political Infighting Weighs On Sentiment, ASX SPI200 Futures Down 67 Points
Investors continued to take risk off the table on Monday following the UK referendum on Friday to leave the European Union. The British Pound has been an excellent gauge for market sentiment prior to the referendum and will continue to be over the coming weeks, the Pound declined a further -3.45% on Monday shown on the first chart below, bringing the two day declines to 12% amid political infighting and downgrades from credit rating agencies. While the Chancellor of the Exchequer George Osborne sought to calm markets on Monday insisting the U.K. economy is in a strong position to adjust to leaving the EU although the "economy is going to have to adjust to the new situation", political infighting amongst the Labour party has broken out over calls for a vote of note confidence in current leader Jeremy Corbyn. Shadow Ministers have publicly withdrawn support as the leadership will be critical moving forward as they will also have a seat at the table when negotiating with Europe. This adds to uncertainty at a time when Scottish First Minister Nicola Sturgeon is potentially planning for a second independence referendum. Elsewhere credit rating agencies S&P Global Ratings downgraded the UK by two levels to AA from AAA reflecting "the risks of a marked deterioration of external financing conditions", while Fitch Ratings also downgraded by one notch to the equivalent level. European equities dropped led by the DAX30 & FTSE100 both down -3.02% & -2.55% respectively with Banks leading declines. European banks are likely to continue to be the worst impact by this as the potential for slower growth weighs on potential bad debts and the prospect of lower rates continuing to squeeze margins. The second chart below highlights the UK 10 year government bond yield which has declined to a record low 0.9345% and the market is now pricing in a 52% of a rate cut at the Bank of England's July meeting, up from 11% on Thursday. While uncertainty can affect all risk assets and increase volatility over the coming weeks, to put things in perspective overall it is unlikely the Australian economy will be greatly impacted by the Brexit with the U.K. being only our 7th largest trading partner with around $20.7 billion in trade compared with China or the U.S. with a respective $152.4 billion & $60.4 billion. The declining value in the Australia Dollar given the "risk on" nature of the currency also softens the impact from any falling commodity prices and will be supportive for exporters as well as attracting foreign tourism.
U.S. equity markets also continued Friday's declines with both the S&P500 & Nasdaq100 falling -1.81% & -1.98% respectively as the US Dollar index gained 1.15%. Despite a stronger US Dollar commodities were broadly higher with the exception of both WTI & Brent crude oil which declined -2.75% & -2.58% respectively, Copper gained +0.55%, Natural Gas +2.03% and Iron Ore +6.42%. Spot gold continued to push higher gaining +0.67% as investors move into safe haven assets while spot silver was little changed falling -0.02%.
Locally the ASX200 gained +0.47% on Monday as the Australian dollar fell -1.82%, meanwhile the market is set for a decisively weaker open this morning with ASX SPI200 futures down 67 points. If you're interested in trading global markets and still need practice, click here to open a free $100,000 Rivkin Trader account.
· US GDP (QoQ Q1) 10:30pm AEST
· US Personal Consumption (QoQ Q1) 10:30pm AEST
· US S&P/Case-Shiller US Home Price Index (YoY Apr) 11:00pm AEST
· US Consumer Confidence (MoM Jun) 12:00am AEST
Source: Rivkin, Bloomberg
This article was written by James Woods – Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via [email protected] or by phoning +612 8302 3600.