Market Takes Another Step Away From The Edge, Dollar And Yen Ease

Since the murder of UK MP Cox last week, the mood in the markets shifted. Today is the continuation what was seen in the last two sessions last week.  The difference is that participants seem more confident, as the polls and betting odds seem to support our initial recognition of the tragedy’s potential to impact psychology.  

As we noted in our review of speculative positioning in the futures market, there was interest in buying sterling prior to last week’s reversal. In the week ending June 14, the gross long sterling position jumped 25.4k contracts to 61.7k. That is new buying, which is different than short-covering. There were some short-covering, 4.3k contracts (to 98.4k), but it amounts to 1/6 of the new buying. 

Sterling is the strongest currency today, gaining 2% against the US dollar and 1.4% against the euro. The FTSE is posting a sharp advance of almost 2.5% but is lagging other main European bourses and the more than 3% gain in the Dow Jones Stoxx 600. It is interesting to note the sectors doing best in the UK: financials (+3.6%) and information technology (3%). Consumer staples (1.4% and materials (1.6%) are the laggards in late-morning turnover. 

UK gilts are bearing the brunt of the unwind of safe haven flows. The 10-year yield is up seven bp to 1.21%,and the 2-year yield is up five bp to 43 bp. This is only a couple basis points more than US Treasury yields have risen today. Peripheral benchmark 10-year bond yields are off 8-11 bp.  During period anxiety, intra-EMU spreads widen over Germany, as anxiety eases, the spreads narrow. The introduction of sovereign bond buying has not altered that general pattern.  

Asian equities popped higher at the open, with both the MSCI Asia-Pacific Index and the Nikkei gapping higher.  The Nikkei closed 2.3% higher, its biggest gain in almost two months. The MSCI Asia-Pacific Index gained 1.8% and was making new highs late in the session.  Chinese shares advanced, but fractionally (Shanghai Composite +0.1%), and underperformed India (0.8%) despite news that the central bank governor who is respected by many investors, is stepping down when his terms end in early September.