June has historically been one of the weaker months of the year for stocks and this month has started with many markets around the world kicking into reverse. Overnight the Nikkei fell 1.6% while the Dax and FTSE are down about 0.7% and US index futures for the Dow and S&P are down 0.3%. In commodity trading crude oil is down 1.3% and copper is down 1.0%.
Soft manufacturing PMI results and a subdued global growth outlook from the OECD are dragging on sentiment. China’s reports continued to hover around 50 indicating its economy whis still muddling along while Japan remains firmly in contraction territory. Major Eurozone economies came in below expectations but above the key 50 dividing line.
The OECD criticized governments and central banks around the world for creating a low growth trap. The agency indicates governments haven’t done enough to boost demand restructure their economies since the 2008 financial crises and have not done enough on the fiscal side to stimulate growth. It went on to indicate that ultra-easy monetary policy, which has been left to do all the work, is losing effectiveness. It also indicated a negative feedback loop working with low growth leading to low investment and low trade. This suggests that the Fed’s course of slow interest rate increases could be helpful toward improving confidence.
In fact, one major country that did announce fiscal measures today, Japan has seen its stocks hammered and its currency rally. PM Abe confirmed plans today to delay a sales tax increase by 2 ½ years to late 2019. The street took this as a sign of weakness and just like when the Bank of Japan brought in negative interest rates back in January, capital fled out of stocks into the currency sending JPY sharply higher and the yen sharply lower.
The OECD joined the chorus of agencies warning on the risk of Brexit but this had no impact on the FTSE or GBP as economic threats from unelected bodies are being increasingly ignored by traders. Interestingly, the UK was one of the few major countries to post a positive PMI report climbing back above 50 into expansion territory this month even as the referendum debate intensified. A YouGov poll showed the two sides running neck and neck at 41% each. Sterling stabilized after unwinding last week’s rally suggesting that the close race could spark significant trading swings within a sideways range heading toward the big vote three weeks from tomorrow.
There’s a lot of news still to come today for North America including manufacturing PMI reports for the US and Canada, US construction spending and the Fed’s beige book regional economic report which along with tomorrow’s ADP payrolls and Friday’s nonfarm payrolls could drive speculation on whether the Fed may raise interest rates in June or July.
In Canada, National Bank wraps up bank earnings season missing slightly on earnings but announcing a dividend increase. The bank indicated that outside or the increased provision for oilfield credit losses it announce a while back, operations and lending continues steady growth. Overall bank earnings season was positive but it remains to be seen if they will be able to continue their upward course now that all the news is out for a while.