ECB Stands Ready For Brexit Scenario, Janet Yellen Says Fed To "Proceed Cautiously" In Senate Testimony, ASX SPI200 Futures Up 15 Points

In a speech to lawmakers in Brussels on Tuesday European Central Bank President Mario Draghi reaffirmed that the ECB “stands ready” to act in the event of a Brexit. Although it would be difficult to fully estimate the impact of a Brexit on markets and the EU “the ECB is ready for all contingencies following the U.K’s EU referendum”. Mr Draghi was also given a boost on Tuesday as a German court dismissed challenges to stop the Bundesbank participating under the ECB’s OMT (Outright Monetary Transactions) program launched in 2012 which has never been called upon stands ready to support Euro-zone government for financial assistance with the aim of preventing divergences in short-term bond yields. European equities rallied with both the DAX30 & FTSE100 gaining +0.54% & +0.36% respectively while the British Pound highlighted on the image below, traded at the highest level since the referendum data was announced in February as momentum has recently swung in favour of the Remain vote. 

Across the Atlantic US equity markets were also higher as both the S&P500 & Nasdaq100 gained +0.27% & +0.30% respectively as Fed Chair Janet Yellen testified before a Senate Banking Committee that “proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labour market will strengthen further, and whether inflation will continue to make progress toward our 2 percent objective”. On the disappointing May employment report she warned against overreliance on a few monthly readings that “it is important not to overreact to one or two reports” and that “labour market conditions still look favourable” and the market will look to the June payroll figures to assess whether May was an anomaly or perhaps part of a bigger trend. Overall the testimony leaned to a cautious and dovish tone in contrast to multiple Fed President and Janet Yellens own comments in May for the likelihood of a June or July hike suggesting the disappointing May payroll figures have significantly concerned the FOMC. The US economy still faces headwinds from both weak productivity growth and low business investment as “The FOMC continues to anticipate that economic conditions will improve further and that the economy will evolve in a manner that will warrant only gradual increases in the federal funds rate”. Finally risks to the economy were also cited including those from outside the U.S. including the Chinese economy and Thursdays Brexit referendum with the central bank standing by ready to act if needed.

Commodities were broadly mixed as the US Dollar index gained +0.43% with both WTI & Brent crude oil falling -1.05% & -0.06% respectively while both Natural Gas & Copper gained +0.76% & +1%. Precious metals Spot Gold & Silver both declined -1.68% & -1.89% as subsiding fears over a potential Brexit reduce safe haven demand. Other measures of safe haven demand also declined with the Yen falling -0.78% against the US Dollar while German 10 year government bonds were unchanged as the yield remained at +0.05%.

Locally the ASX200 closed +0.33% higher on Tuesday and the market is set to open stronger again this morning with ASX SPI200 futures up a further 15 points. The Reserve Bank of Australia released the meeting minutes from June that was largely in line with expectations, highlighting GDP growth in the first quarter was stronger than expected reflecting some expansion in non-mining activity which was supported by historically low interest rates. Further declines in mining investment is likely to be largely offset by resource exports however any appreciation in the exchange rate could complicate this adjustment. The minutes highlight that unemployment remained stable however that employment growth momentum have lost some momentum, which was also further evidenced by last week’s unemployment data showing that while 17,900 new jobs were added these were all part time.

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Data releases:

·         Australian Westpac Leading Index (MoM May) 10:30am AEST

·         US House Price Index (MoM Apr) 11:00pm AEST

·         FOMC Chair Janet Yellen Continues Testimony on Monetary Policy at the House Financial Services Committee 12:00am AEST

·         US Existing Home Sales (MoM May) 12:30am AEST

·         US Crude Oil Inventories (June 17th) 12:30am AEST

Source: Rivkin, Amibroker, Esignal

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via or by phoning +612 8302 3600.

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