Financial market research and analysis

The US dollar softened against all of its G10 peers in Asia, except the yen. The Aussie and Kiwi were the biggest gainers overnight (>1%). Gold gave back $10, while WTI strengthened 1.42% on improved risk appetite.

Although the FTSE opened upbeat in London this morning, investors should keep in mind that Moody’s, S&P and Fitch have downgraded the UK’s credit rating. And even if UK banks are a better bid during the early hours of trading in London, the market is now pricing in the possibility of a rate cut from the Bank of England in an effort to temper potential economic damages as the UK prepares to quit the European Union.

According to activity in the Gilts market, there is a 75% chance of a BoE cut before the end of this year. Given that the UK’s bank rate is already at a historical low of 0.50%, an attempt to lower rates will of course erode profit margins. On the other hand, UK banks will also bump into regulatory and compliance issues, which could also generate additional costs in the next couple of quarters and weigh on banking sector profitability. It is therefore too early to think that the rally in the banking sector could be a sustainable one. Nevertheless, a rapid glance to the screen suggests a better appetite today; Lloyds (+5.42%), Barclays (+5.94%), HSBC (+1.42%) are paring post-Brexit losses.

We warn that the credit rating downgrades and a lower rate outlook are important red flags that investors should consider before blindly jumping on the back of a bull. We restate that the volatility is a sign of stress on both sides. Rapid gains are as dangerous as wild sell-offs. David Cameron is heading to Brussels to meet European leaders as the EU Parliament debates the implications of a Brexit.

Some colour out of the FX markets

The EURUSD consolidates losses below the 1.1100 level (200-day moving average). Bids are eyed at 1.0940 (major 61.8% retrace). Surpassing the 1.1100 resistance level, the pair could recover towards 1.1235 / 1.1283 (100 and 50-day moving averages respectively).

The yen has been the only loser against the US dollar in Tokyo as a growing number of traders are now expecting two rounds of policy easing from the Bank of Japan within the next year. This is the most efficient way to halt the undesired appreciation in the yen immediately. Following last week’s heavy drop, there is potential for an upside correction towards 105.

Cable is a better bid, yet downside risks prevail as S&P, Moody’s and Fitch downgraded the UK’s credit rating following the Brexit vote.

Despite little appetite in gold today, the yellow metal consolidates gains above the $1300 level. Political uncertainties in the UK and the potential contagion effects across the EU, could encourage a rise towards 1400$/oz in the mid-run.

Randgold Resources (-2.49%) and Fresnillo (-1.99%) are the bigger losers in the FTSE today. Losses are expected to remain limited as we could well be watching a butterfingered optimism.