European Equities Break Four Day Winning Streak, RBA To Hold Rates At 1.75%, ASX SPI200 Futures Down 13 Points

European equity markets closed lower on Monday snapping a four day winning streak to recover just over half of the losses caused by the U.K.’s decision to leave the EU. The DAX30 & CAC40 both fell -0.69% & -0.91% respectively, the Euro closed relatively flat up +0.03% as did the Pound up +0.12%. Elsewhere the FTSE100 closed -0.8% lower while the FTSE250 was down -1.7%, I’ve mentioned this before but I think it’s important to note that the FTSE100 may not be the best index to gauge the economic impacts on the U.K. A large contingent of this index have international exposure with earnings overseas and the 11.5% drop in the Pound is certainly shielding these companies, the chart below highlights the FTSE100 & FTSE250 of which the FTSE100 has surpassed pre-Brexit highs on the cusp of turning into a bull market while the FTSE250 representing companies with more domestic based earnings is around -7% lower.

Overnight U.K. Markit Construction PMI for June was released with a reading of 46.0 vs 52.1 from a month earlier and expectations of 50.7, a reading below 50 signals contraction and vice versa. Key policy makers have recently stepped in to calm markets, Chancellor of the Exchequer George Osborne has recent stated his goal of lowering the corporate tax rate from 20% to 15% after 2020. The rate is already scheduled to fall to 19% in April and 17% in 2020. Bank of England Governor Mark Carney has continued to address threats to the financial system appearing on national television over the past two weeks and is set to outline further macro prudential tools available to support the economy including the possibility of reversing capital requirement increase for lenders from March. These efforts will continue to be supportive of equities however I would not expect volatility to go away any time soon until we have some clarity around the U.K. political situation and the beginning of negotiations from Europe.

The US Dollar index closed -0.13% weaker overnight as U.S. markets were closed for the 4th of July long weekend. The weaker dollar helped boost gains in spot gold & silver which have already been benefiting from ultra-loose monetary policy and investors fleeing to safe haven assets following the Brexit referendum. Spot gold closed +0.70% higher while spot silver gained 2.86%, the second chart below highlights the recent gains in the precious metals following a rally that began in January. Elsewhere Brent crude closed -0.5% weaker as the market assess reports that Nigerian militants have attacked oil pumping facilities amid a ceasefire with the government, despite attacks over the past few months Nigerian production increased 90,000 barrels per day in June compared with May. The market will continue to wait to see any impact and Nigerian oil workers are set to strike on July 7th over job losses.

Locally the ASX200 closed +0.67% higher on Monday with Materials leading gains up 3.30% boosted by commodity prices including Iron Ore which rose +3.48% on Monday, meanwhile the market is set for a weaker open this morning with ASX SPI200 futures down 13 points in overnight trading. The Reserve Bank of Australia is set to announce its monetary policy decision for July at 2:30pm AEST. It is unlikely that the RBA will act and lower interest rates at this meeting from the already record low, the more likely scenario is to wait until after August when we have the next inflation readings out to assess whether the May rate cut has brought about the desired effect on inflation. They will also want to assess any potential impacts from Brexit however as I’ve mentioned previously any effects should be minimal given the EU & U.K. are relatively small in terms of trading partners compared with China, Japan and the U.S.

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Data releases:

·         Australian Trade Balance (MoM May) 11:30am AEST

·         Australian Retail Sales (MoM May) 11:30am AEST

·         Chinese Caixin PMI Services & Composite (MoM Jun) 11:45am AEST

·         Japanese Nikkei PMI Services & Composite (MoM Jun) 12:00pm AEST

·         RBA Interest Rate Decision (July) 2:30pm AEST

·         German & EU Markit PMI Services & Compsite (MoM Jun) 6:00pm AEST

·         Euro-zone Retail Sales (YoY May) 7:00pm AEST

·         Bank of England Financial Stability Report 7:30pm AEST

·         US Durable Goods & Factory Orders (MoM May) 12:00am AEST

Source: Rivkin, Bloomberg

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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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