The GBP continued its decline as the candidates who are competing to replace UK Prime Minister Theresa May hold different views and there has been a high possibility a more ardent Brexiteer will replace PM May. Meanwhile, President Jean-Claude Juncker stated yesterday that the EU will not renegotiate the Brexit deal that PM May has agreed upon. Currently, the Labour party is leaning towards either a general election or a second referendum with the latter being mentioned more and more by senior party members. A second referendum might be backed by opposition leader Corbyn within days. This could further complicate the situation and cause the GBP to be more volatile.
The EUR edged lower this morning, as Italy’s dispute with the European Commission weighed on investors’ confidence. The commission could fine Italy 3 billion euros for accumulating debt and deficits that break EU rules, causing markets to reive previous fears of the Italian budget crisis considering that the Italian far-right party La Liga was the clear winner of the EU elections in Italy. The strength given to the EUR from the European election results also proved short-lived. Although Pro-EU parties set to retain a majority overall, Eurosceptic and anti-establishment groups have seen their share increase to more than 30% of the seats which has increased the political uncertainly in the EU and a longer negotiation period will be needed to select a new leader. Coupled with the dire state of the Eurozone economy that has seen manufacturing numbers contracting for consecutive months, more weakness lies ahead for the EUR.
China’s central bank injected around 250 billion yuan yesterday (£28.6 billion) taking over the struggling Baoshang bank. Worries that Baoshang might cause problems for smaller regional banks and the money market in general forced the PBOC to intervene, the first rescue of this kind since 1998. Additional injections were spent in reverse bond repurchase agreements opening the door to cuts and other mechanisms to boost the market which sent the swap curve upwards.
The trade tensions between the United States and China are showing no signs of easing and a deal between the US and Japan doesn’t seem to be as imminent as anticipated causing most stock markets to fall yesterday. E-mini for the S&P 500 fell 0.3%, Eurostoxx 50 fell by 0.7% and losses were registered for the DAX, FTSE and CAC 40 slipping 0.6% each. MSCI also fell 0.5%, Nikkei 1.2% and Australian shares 0.7%. The fall in oil and currency markets was mostly marginal.
