Morning Briefing – Theresa makes it

<p>The final act of the barely believable political drama in Westminster and the announcement of a new fiscal stimulus package in Japan kept up a tailwind for some risky markets on Tuesday. </p>

  • The final act of the barely believable political drama in Westminster and the announcement of a new fiscal stimulus package in Japan kept up a tailwind for some risky markets on Tuesday. Or perhaps FX and shares have just been sent flying by the downdraft from a helicopter? It’s speculated that a visit to the Bank of Japan by former Federal Reserve chair Ben Bernanke might presage the central bank enacting pet policies he is said to favour, often dubbed by the market “helicopter money”. It’s meant to refer to a set of ways to finance government budgets and fight deflation that involves the most ‘direct’ injections of cash possible. Bernanke is set to meet PM Abe on Tuesday.
  • Either way, prospects of as much as 10 trillion yen in government spending—according to Reuters, citing government sources—have lopped a further 0.5% off the yen against the dollar this morning. That draws the yen even further away from the psychologically important 100 yen level against the greenback. The pair is now challenging strong resistance around 103.40 yen, a level that has capped the rate on a weekly basis for two out of the last three weeks. Perhaps unsurprisingly among majors, the yen is losing the most against the pound. GBP/JPY is barely touching the bottom of the ‘Brexit gap’ though. A BoE no-move and a quick triggering of BoJ’s new plan would do the trick, we guess.
  • Elsewhere, the pound continues to bask in the post Theresa May ‘coronation’ afterglow. It has taken the withdrawal of the last right-leaning Eurosceptic standing, Andrea Leadsom, to raise an unmistakably positive reaction in the City.
  • It was the mid-cap FTSE 250 index that benefited the most on Monday—rising as much as 5%—and that gauge was extending that rise on Tuesday as I wrote this. It was finally catching up with the FTSE 100 which has outperformed all major stock markets since 23rd June. It might not be all about sterling, but with 50% of FTSE 250 revenues generated first in sterling, compared to 20% of the benchmark’s aggregate revenues, the pound’s ongoing rebound is helping the index of large(ish) domestic-focused British firms. The FTSE 250 was 1% higher after gaining 3.5% on Monday, and the pound was adding 1.4% to Monday’s 1.3%. That put increasingly severe pressure on euro/sterling, which was 78 points lower on the day and, crucially, touching the upper trend line of the rising channel in place since November 2015 that we’ve been watching for weeks now. We expect a sustained downward break could bring a spectacular fall, though we suspect such a break won’t happen in the near term. Chances would improve below 83.5p. Last price 84.42p.
  • The FTSE has gone from being the outperformer among big indices since Brexit, to being one of the underperformers over the last session and a half. It was last up a paltry 0.1%, compared to the Nikkei’s c.6% two-day advance and the S&P 500’s confident step up to a new record closing high of 2137.16. SPX’s previous record intraday high was 2134.72 and was marked in May 2015. The DAX was also still firmly in risk-on mode, adding 1.5% to 2% made on Monday. In-line German inflation data (+0.1% month-month, 0.3% annually) may have helped. The main meat in terms of economic releases won’t really be seen until Wednesday anyway. China’s Trade Balance will be out early in the morning, EU Industrial Production later, Bank of Canada decision in the afternoon, before Australian jobs and the BoE on Thursday.

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