Morning Briefing 8211 June 14th 2016

1036 BST

• Little discernible improvement in risk appetite overnight. The pound is still near 2-month low vs. the dollar, 3-year low vs. yen, whilst sterling options implied volatilities are elevated across the board, with record highs in the shortest expiries from a month and lower. It’s a similar picture in the next most sensitive options market, euro against the pound. Though the most liquid expiry, 3-month is looking more offered this morning, premiums have ratcheted well past the previous almost 7-year high to levels last seen in March 2009. For cable, little guesswork is required to see that the balance of probabilities lies to the downside as the rate slices through a range of supports. Some focus has been cited on 1.4240, which is now seen as a strong and pivotal resistance. Softer-than-expected UK CPI, especially at the core, has played into sterling weakness. By contrast, the main Eurozone data has ‘beat’ this morning: the Industrial Production index rose 1.1% month-on-month vs. 0.8% forecast and 2% year-on-year, vs. 1.5% foreseen. This has helped EUR/GBP back into 0.792 pence, though 80 pence still looks a stretch in the near term.
• As has been the pattern for several days the sterling market, and in turn the seemingly increasing chance that the UK will vote to leave the European Union, have overshadowed markets in Asia and beyond, with international officials and economists warning that Britain leaving the economic and business bloc could tip Europe and possibly the UK back into recession. The Nikkei closed 1.5% lower extending its two-day loss to 5%, and precipitating another record low in Japanese government bonds.
• Uncertainty over this week’s Federal Reserve policy meeting is an additional weight on markets. The chance of a rate hike is now as good as zero, judging by trading of Federal Funds futures. The much weaker-than-expected May nonfarm payrolls report put paid to the always dicey notion that the Fed was going to hike about a week before a potential Brexit. What traders seem to be concerned about now is that the Fed could do something akin to what the Reserve Bank of Australia did at its last meeting: a hawkish non-hike. In other words, keep policy unchanged but keep banging the drum about the near-inevitability of a rate increase in the near term. That is likely to be what transpires from Wednesday’s announcement, but sentiment would react much better if guidance pointed to the September Fed meeting instead of the July one.
• Fed policy is not the only central bank thinking on tap this week. In fact the week will be chock full of updates on policy from a gaggle of some of the most influential central banks in the world. Influential that is, when they actually set policy. The Bank of England, the Bank of Japan and the Swiss National Bank are almost unanimously not expected to do anything this week, at least on the new policy front. All are forecast to stick to previously announced actions. It’s this sort of stance that has partly been behind the galloping levels of typical safe-haven currencies the franc and of course the yen. Japanese Finance Minister Taro Aso did issue a fresh warning against renewed strength in the yen overnight, saying that he would “firmly respond” if rapid and speculative moves persisted in the foreign exchange market. Indeed, intervention that goes beyond the verbal level could undoubtedly be seen at some point. However, recent history has shown that the effect of such moves tends to be temporary, unless they are sustained and aggressive, and there are questions around the appropriateness of such actions at the current time. Note that yen values were more than 20% higher last time the BoJ acted in such fashion between 2009-2011. There is also a diplomatic element. The United States, through Treasury Secretary Lew, has made it clear this year that the US would frown upon real intervention, certainly at current levels.
• Elsewhere on the ‘risk curve’ crude oil prices have also failed to recapture a bid and both major contracts were down between 1.3%-1.5% at online time, though it looks like supply outages in Nigeria are containing these falls and oil overall continues to look well supported, with the $50 level attractive. So long as both crudes continue to butt up against that price in the near term, it makes sense that bouts of trading above it will extend over time as the market takes into account moderate declines in supply compared to a year ago and limited willingness or success by key players such as Iran to ramp supply higher.
• Stock trading looks set to remain ugly for a while though, absent any fresh polls giving more of a sop to the Remain side in the Brexit saga. It is worth pointing out that the other major indicator of the potential outcome on 23^rd June—betting odds—have consistently pointed to an ‘In’ outcome, though ‘Brexit’ odds have been strengthening for the last few weeks. The DAX is down more than 1% again as I write this, after a similar-sized fall on Monday, the CAC-40 also ails and the broad STOXX 600 is appropriately down more than a percentage point too. In the UK itself, it looks like the market is beginning to question the well-worn thesis that the impact on UK blue chips might be limited. The FTSE 100 has fallen for four straight sessions and is currently testing levels last seen during Februay’s sell-offs. 5963 seems to be a support worth watching.
• Next economic focus looks to be US Retail Sales at 1.30 pm BST. The reading is seen slipping hard on the monthly level after +1.3% in April, though forecast to be steadier ex-autos and car fuel, where it might tick back to +0.3% after +0.8% last time. The Energy Information Administration crude oil inventory update on Wednesday at 3.30pm could tip the balance for crude oil.