Morning Briefing – Gove speaks

<p>The next episode in Britain’s political soap opera will begin at 11 this morning, when Justice Secretary Michael Gove, AKA the Assassin in Chief, gives the first speech of his campaign to lead the Conservative Party.</p>

  • The next episode in Britain’s political soap opera was set to begin on Friday morning, when Justice Secretary Michael Gove, AKA  the Assassin in Chief, was scheduled to give the first speech in his campaign to lead the Conservative Party after dispatching fellow Brexiter and former front-runner Boris Johnson. Perhaps the most remarkable thing from the markets point of view is that the impact from one of the most outlandish Westminster dramas for decades—and a sub-plot about Labour’s implosion—has been almost neutral. It was left to Bank of England governor Mark Carney to deliver Thursday’s real market-sensitive news, thrashing the pound to within inches of last week’s 30-year low, but just as importantly boosting stocks, with a message that a fresh influx of cheap money was as good as baked in.
  • It was a message that travelled, to a varying extent, across global assets. But after the Dow Jones Industrial Average and S&P 500 indices both closed about 1.3% higher, the biggest Asia-Pacific stock markets only took the baton half-heartedly, leaving Shanghai’s Composite Index 0.1 of a percentage point higher and the Nikkei only somewhat better with a 0.7% rise.
  • Direction in the region was complicated by markets having to swerve round a big dump of manufacturing data. Little of it was particularly promising. China’s official Purchasing Managers’ Index (PMI) slipped a tick to 50 in June, dead on the level that is supposed to separate growth from contraction. Data on China’s services sectors were a ray of light, ticking up to 53.7. However, Caixin’s unofficial factory index eclipsed a lot of the non-industrial cheer. Its index fell to a four-month trough of 48.6 in June, from 49.2 in May. The Bank of Japan’s quarterly Tankan survey of factory sentiment also found little collective confidence. That was confirmed by a PMI which remained in contraction territory, despite an uptick to 48.1.
  • Ironically, perhaps, British and European industrial sentiment was better during the same period that was measured in Asia, although bear in mind EU and UK PMIs out this morning included soundings taken way before last week’s Brexit vote. Either way, the UK Manufacturing PMI brought a welcome and better than expected rise to 52.1 vs. 50 expected and 50.1 in May, whilst Europe’s was an even stronger 52.8 against 52.6 expected and 51.5 in May.
  • Two more major PMIs are still to come on Friday in the US. Markets tend to react more to the one from ISM. An official one will be out a little earlier.
  • The simultaneous risk on/risk off duality continues, though it’s largely explainable by the broad expectation that central banks will resort to yield destruction, again. Regardless of this, some market participants are compelled to keep buying out of necessity. In other words, there’s been no let-up in the demand for safe-haven assets, and these assets are costing ever more to hold, because their yields continue to set record lows, or grind deeper into negative territory. This has been seen across benchmark European and Japanese yields, and, a few minutes ago, there was a new record low in US 10-year Treasury yields too. Yield curves are flattening anew as well. Gold is strong, up about 0.8% at last check; the yen and the franc remain in high demand; with 102.5 yen threatening to nix the dollar’s entire gain on Thursday.
  • S&P futures aren’t playing ball, but stocks elsewhere are partying on, albeit with a little less enthusiasm: the DAX was latterly +0.5% and FTSE +0.3%.

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