Sterling holds gains in nervous European markets

Sterling was holdings its gains today on European markets, though it remains not far above the 30-year lows reached in the wake of the Brexit vote. The pound was trading at just under $1.34, while the euro has also gained against the US currency.

Traders said that the mood in the markets has calmed somewhat on hopes that the UK and the EU will in time reach a deal which is not too damaging for either side. Hopes that the Brexit threat will lead to lower worldwide interest rates is also supporting share prices.

Asian shares were swept up in a global relief rally on Wednesday as the immediate drag from the Brexit vote began to ebb and investors wagered central banks would ultimately ride to the rescue with more stimulus measures.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.0 per cent to recoup around one-third of Friday’s stinging loss. Japan’s Nikkei climbed 1.6 per cent, while Australian stocks added 0.8 per cent.

In Europe, shares were around 2 per cent higher in morning trading.Any bounce was welcome, given global equity markets shed $3 trillion in value in the two days following Britain’s shock vote, according to S&P Dow Jones Indices.

Investors also pointed to solid US economic data as helping to steady the ship. Yet Britain’s course out of the EU remains unknown, leaving the future of the entire bloc and its currency an open question. “The only certainty in Europe is uncertainty,” analysts at ANZ said in a note. “European leaders appear to want to move forward with Brexit plans as quickly as possible, but political turmoil within Britain suggests a quick turnaround is unlikely,” they wrote.

The unease was evident in sterling, which slipped a third of a US cent overnight to huddle at $1.3332, not far from the recent 31-year low of $1.3122. It edged up later to just under $1.34. The euro regained only a little ground to $1.1064, while the safe-haven yen steadied at 102.33 per dollar. For now, investors are counting on central banks to step in with fresh stimulus to support markets over time. Japanese Prime Minister Shinzo Abe urged the Bank of Japan to provide ample funds to ensure market liquidity. In the first of Federal Reserve policymakers to comment since the vote, Governor Jerome Powell said it had shifted global risks "to the downside". That only reinforced market expectations the Fed will no longer be able to hike US rates this year, and could even be forced to cut if the domestic economy falters.

Yielding less than nothing

On Wall Street, the Dow ended Tuesday up 1.57 per cent, while the S&P 500 gained 1.78 percent and the Nasdaq 2.12 per cent. Badly beaten financials and tech stocks were among the top gaining sectors. The calmer mood was reflected in the CBOE Volatility Index which fell about 21 per cent on Tuesday to near where it was before the vote. It was its largest one-day percentage decline since August 2011.

Aiding sentiment was data showing the US economy grew at a 1.1 per cent annualised rate in the first quarter, rather than the 0.8 per cent pace reported last month. Yet concerns about the impact of Brexit on global growth, plus all the talk central banks might have to ease anew to offset it, kept sovereign bonds well supported. Yields on US 10-year notes held at 1.47 per cent, just above a near four-year low of 1.406 per cent hit on Friday.

Comparable German and Japanese bonds are into record territory and pay negative yields. Indeed, all Japanese bonds out to 40 years now offer less than 0.1 per cent, a nightmare for pension funds and insurers desperate for a “decent” return. In commodity markets, gold was firmer around $1,319.00 an ounce, off a low of $1,305.23 touched Tuesday. Oil prices gained as a looming strike by Norwegian oil and gas field workers threatened to cut output. There were also reports oil producers and refiners in crisis-struck Venezuela were struggling to keep output up. US crude oil futures were up 27 cents at $48.12, while Brent crude rose 21 cents to $48.79.

Reuters