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GLOBAL MARKETS-Stocks and sterling bounce after Brexit bashing

Published 2016-07-07, 05:16 a/m
© Reuters.  GLOBAL MARKETS-Stocks and sterling bounce after Brexit bashing
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* European stocks open up 1.5 percent after three days of
falls
* Bond yields near record lows, central bank easing seen
* Oil rallies, sharp drop expected in US stockpiles
* Aussie dlr takes dip after S&P ratings warning

By Marc Jones
LONDON, July 7 (Reuters) - Share markets climbed on Thursday
as upbeat U.S. economic data took some of the sting out of the
Brexit scare, while the Australian dollar dipped as the
country's triple A credit rating came under threat.
The European market started firmer with the FTSE .FTSE up
1.7 percent, the CAC in Paris .FCHI 1.9 percent higher and
Germany's DAX .GDAXI rising 1.3 percent. U.S. S&P futures
ESc1 pointed to a 0.2 percent bounce.
In the currency market, Brexit-battered sterling also
steadied at $1.2980, while the Aussie dollar fell as low as
$0.7467 AUD=D4 after Standard & Poor's cut the country's
rating outlook to negative from stable, citing a need for fiscal
repair.
The agency had warned it may act after inconclusive
elections over the weekend suggested the next government would
have a hard time getting reforms through to law.
However, investors are less sensitive to ratings these days
given so many countries were downgraded in the wake of the
global financial crisis and the Aussie soon steadied at $0.7511.
Likewise, Australian bond futures barely budged YTCc1 as
10-year yields of 1.88 percent make the debt highly attractive
compared to the negative yields of some of its peers.
Italy led a move higher in southern European bond yields
meanwhile as the rising popularity of the anti-establishment
5-Star Movement (M5S) and concerns about a banking sector
saddled with bad debts rattled investors.
Polls showed this week that the M5S -- which has called for
a referendum on euro zone membership and triumphed in local
elections last month -- is now Italy's most popular party, ahead
of Prime Minister Matteo Renzi's Democrats.
Italian 10-year bond yields rose 3 basis points to 1.20
percent IT10YT=TWEB, pulling away from the German benchmark
which was flat at minus 0.17 percent
"It all circles around Renzi being able to win this
referendum, with these legacy problems in the banks also coming
back to haunt Italy," Commerzbank (DE:CBKG) strategist David Schnautz
said.

RESILIENT
Earlier in Asia, the mood had been one of relief that Brexit
fears had faded for the moment. MSCI's broadest index of
Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.8
percent.
Japanese shares were restrained by a strong yen and the
Nikkei .N225 slipped 0.9 percent.
Still, it was notable that while bond markets have been
signalling recession, equities had stayed fairly resilient.
"The most optimistic interpretation is that markets believe
a limited regional shock is going to result in a significantly
easier stance for global monetary policy," David Hensley, an
economist at JPMorgan (NYSE:JPM), said in a note.
"At ground zero, the Bank of England has indicated it may
soon cut rates. There is widespread speculation the BOJ and ECB
will ease, a view we share."
More importantly, JPMorgan believes the Bank of England will
revive its quantitative easing process while the British
government reverses course on austerity and loosens fiscal
policy, which could be a green light to fiscal expansion
globally.

NO FED HIKE UNTIL 2019?
Sentiment got a welcome lift from a survey showing activity
in the giant U.S. service sector hit a seven-month high in June
as new orders surged and companies hired more.
That helped the Dow .DJI rise 0.44 percent, while the S&P
500 .SPX gained 0.54 percent and the Nasdaq .IXIC 0.75
percent.
Minutes from the U.S. Federal Reserve's June policy meeting
confirmed what was already suspected - that officials were
concerned ahead of the Brexit vote, which subsequently erased $3
trillion from global equities over two days.
The British pound remained vulnerable at $1.2975 GBP=4 ,
having slid almost 3 percent in the previous two sessions to
carve out a 31-year trough of $1.2898.
The safe-haven yen was well bid at 100.73 per U.S. dollar
JPY= , while the euro held steady at $1.1090 EUR= .
Markets have assumed the uncertainty over Brexit, and the
resulting strength in the U.S. dollar, has made it very unlikely
the Fed will be able to hike rates again this year.
Fed fund futures for December 0#FF: imply a rate of 38.5
basis points, almost exactly where the effective rate is now.
Remarkably, the market is not fully priced for a hike until the
start of 2019.
Treasuries have in turn enjoyed an historic rally that has
taken yields to record lows right out to 30 years. The benchmark
10-year note US10YT=RR was paying just 1.37 percent, some way
below the rate of U.S. inflation.
Indeed, analysts estimate over $10 trillion of government
debt around the world offer only negative yields, a nightmare
for fund managers and insurance companies who have committed to
future pension payments at positive rates.
In commodity markets, oil prices recouped some lost ground
on the better U.S. data and expectations for a sharp drop in
crude stockpiles.
NYMEX crude futures CLc1 were quoted 25 cents firmer at
$47.68 a barrel, while Brent LCOc1 added 23 cents to $49.03.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Brexit currency reactions http://tmsnrt.rs/29gU3MP
Asia rates interactive http://tmsnrt.rs/1U5hc2W
Japan bond yields http://tmsnrt.rs/1RieEON
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