All indicators hint at a limited risk appetite at the start of the week.
The week began with an aggressive sell-off in the Asian stocks. Nikkei (-1.73%) and Topix (-1.54%) disliked the appreciation in yen (+0.44%). Hang Seng (-2.70%), Shanghai’s Composite (-1.99%) and Australia’s ASX (-2.24%) unanimously drove the market south. Altogether, Asian stock fell the most in 6 weeks.
The US 10-year yields advanced past 1.66%, the highest since June. Higher US yields are supportive of the US dollar across the board.
Fed’s Lockhart and Brainard are due to speak today, and markets will certainly be pricing in the slightest hint regarding the Federal Reserve (Fed) meeting due on Sep 21 – 22nd. The US-dollar based speculation will be on the menu heading into the FOMC meeting. Although a September interest rate hike is given a 30% probability, the Fed’s future policy outlook and the likelihood of a rate hike before the end of the year will be the main focus. FTSE opened downbeat
The European stock markets took over a red session. The FTSE immediately slipped below 6700p to match the 1% sell-off in the FTSE futures during the Asian session.
UK's mining and energy stocks are at the bottom of the list as the barrel of WTI trades below $45. Copper futures are off by 1.12%. BHP Billiton (-4.64%), Rio Tinto (-3.74%), Glencore (-3.9%), BP (-1.49%), Royal Dutch Shell (-1.70%)
The pound consolidates below the 200-hour moving average (1.3290) against the US dollar. Even a softer pound appears insufficient to give the slightest smile to the UK stocks.
Cable is expected to remain in bears’ hands into the August inflation data due on Tuesday. The market expects a significant pick-up in the UK’s inflation as a reaction to the Bank of England (BoE)’s 25 basis point cut post-the Brexit vote. A positive surprise is expected to give a bullish spin to the pound and further weigh on the UK stocks. However, a negative surprise should keep the pound under pressure, but with a limited downside given that the expectations for a further BoE rate cut has fallen substantially.
In fact, the post-Brexit era will last years rather than months. In this perspective, the BoE is expected to use the policy tools efficiently over time, rather than all-at-once. As a result, the recovery in the UK yields reflects the meager 22% chances for a December rate hike in the UK. This probability is expected to further dampen and in turn, to underpin the recovery in the UK yields.