BOE’s Carney reminds markets Brexit not all about stimulus

The heady post-Brexit rally looks to be at an end with all major US and European markets down overnight except the FTSE 100, which moved higher only as a response to the further decline in the pound.

Bank of England
Source: Bloomberg

BOE governor Mark Carney, almost the only British leader who seems to not be resigning at the moment, emphasised the challenges the UK economy will suffer in the post-Brexit world and cut the countercyclical capital buffer for UK banks to zero from 0.5%. The concerning Pavlovian response by markets last week as investors blindly bought up stocks believing that Brexit would result in more monetary stimulus displayed a carelessness about the greater economic consequences. Carney’s speech seems to have initiated the dawning of realisation of the longer-term impact of Brexit for many in the markets.

The pound dropped a further 2% against the US dollar overnight as it fell to its lowest level since 1985.

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But the big moves overnight were in the bond markets again with the US 10-year and German 10-year bond yields dropping to new lows. Part of this demand seems to be driven by underfunded pension funds that are desperate for yield and are having to seek out greater duration exposure in order to find it.

Concerns continue to rise about post-Brexit Europe with the focus increasingly turning to the non-performing loan time bomb sitting under Italian banks. Italian Prime Minister Matteo Renzi has now committed himself to an October referendum to reform Italy’s political system in a way that would see an end to Italy’s constantly unstable governments and has said he will resign if it doesn’t pass. Some have been noting the massive discounts available on Italian banks at moment, but they are likely to see continued to volatility in the lead up to the vote. What a year for political betting markets…

But concerns about the viability of Europe’s Club Med countries is not only confined to Italy. EU tax commissioner, Pierre Moscovici, announced last night that Portugal and Spain could face sanctions over failing to take “effective action” to meet their fiscal budget targets as well.

As global yields continue to melt away over these rising risks to the global outlook, gold continues to rally. Gold gained another 0.4% overnight and is increasingly sees little technical resistance until the US$1392 and $1430 levels.

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Asian markets are set to all open lower. The ASX is set to open 0.4% lower with a poor night for commodities setting up a difficult day for the materials and energy sectors. Copper, iron ore and oil all saw big drops overnight. CBA’s ADR lost over 3% in the US session while BHP’s lost 2.8%. But the Nikkei is likely to see the heaviest selling in the Asian session after the yen strengthened 0.8% against the USD.

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