European stocks are shedding a small slice of their post-Brexit recovery as the pound steadies and government bond yields hover near record lows.
After a firm Asia-Pacific performance, the pan-European Stoxx 600 is down just 0.4 per cent – weighed down by a soft showing for banks. London’s FTSE 100, which ended last week at a 10-month high, is down barely 0.3 per cent as miners strengthen but property stocks retreat.
Trading activity is thinned because US markets are shut on Monday for the Independence Day break.
But Wall Street’s presence has been felt. New York’s S&P 500, the equity gauge that tends to set the global tone, closed on Friday at 2,103, just 30 points shy of its record level and 5.6 per cent above the intraday low hit a week ago in the wake of the UK’s decision to leave the EU.
"US equities cruised into the long weekend with a fourth straight positive session . . . rounding off a stunning week for equity markets that confounded the gloomy post-Brexit vote expectations," said Ian Williams, strategist at Peel Hunt.
“The attitude of US investors appears to be scepticism that the UK will ever leave the EU and, if it does, that the global fallout can be largely contained.”
Such reasoning explains why the more globally focused FTSE 100 has now bounced nearly 14 per cent off its post-Brexit intraday low, while the domestically biased FTSE 250 remains down 6.8 per cent since the polls closed on June 23.
Sterling is up 0.1 per cent to $1.3278 on Monday, but its greater than 11 per cent fall over the past 10 days is set to boost the top line of foreign currency earners and has left UK assets looking cheaper to foreign investors.
An important driver of the global stock market rebound are growing expectations that central banks are preparing to ease monetary policy to support their economies from any uncertainty caused by Brexit.
The trend has pushed up the prices of fixed income assets, forcing yields to record lows and making equities seem relatively more attractive.
"As the Brexit shock dissipates, focus is likely to shift to central banks and data," said analysts at Nomura. "While market odds of a Fed hike this year are already in single digits, minutes for the June FOMC meeting Wednesday and, more importantly, employment report Friday will be watched for any surprises."
The Bank of England is scheduled to publish the results of its Financial Stability Report on Tuesday, and governor Mark Carney has said in recent days that the central bank stands ready to act to cushion any fallout stemming from uncertainty surrounding Brexit.
The 10-year gilt yield, which last week hit a record intraday trough of 0.78 per cent, is up just 1 basis point to 0.88 per cent.
The US bond market is shut, so 10-year Treasuries are resting on a yield of 1.46 per cent, while equivalent maturity German Bunds are barely changed at minus 0.13 per cent - both benchmarks only several basis points above their most meagre yield to date.
The yield on 10-year Japanese government bonds hit a record trough of minus 0.26 per cent on Monday, but Australia’s benchmark added 6bp to 2.01 per cent amid concern political stalemate could jeopardise the country’s triple A credit rating.
After the nation’s general election at the weekend resulted in deadlock, Moody’s Investors Service said that short-term political uncertainty would have “limited credit implications” for Australia, but warned that trends in the country’s credit profile “will be determined by whether fiscal objectives are effectively implemented”.
The Aussie dollar shrugged it all off, adding 0.5 per cent to US$0.7533, but most major forex moves are meek. The Japanese yen is just 0.1 per cent weaker at ¥102.59 and the euro is up 0.1 per cent to $1.3274, leaving the dollar index little changed at 95.65.
Gold, which is sensitive to monetary policy expectations, is gaining 0.8 per cent to $1,353 an ounce, while silver has traded above $21 an ounce for the first time since July 2014.
The markets’ generally upbeat mood is supporting industrial commodities, with base metals mostly firmer and Brent crude, the international oil benchmark, up 0.5 per cent at $50.62 a barrel.
Such moves helped the commodity-sensitive Australian stock market to overcome the election uncertainty, the S&P/ASX 200 climbing 0.7 per cent - an outcome in keeping with the regional tone.
Japan's Nikkei 225 added 0.6 per cent, while Greater China bourses outperformed with a 1.9 per cent rally for the Shanghai Composite and a 1.3 per cent advance for Hong Kong's Hang Seng.
– Copyright The Financial Times Limited 2016