The month ahead

Our regular overview highlights the key events in markets last month and what to look out for in July.

A change in policy by the US Federal Reserve and a determination by the Chinese central bank to keep lending conditions tight has contributed to a burst of volatility in global markets. Although the US economy is showing signs of steady improvement, this alone may not be enough to stop the current gyrations. In addition, the eurozone crisis is showing worrying signs of stirring again.

The Fed and China

It probably didn’t turn out as they intended. Ben Bernanke and the Fed had looked to adopt a ‘softly-softly’ approach to the beginning of the end for QE3, but the reaction was far from muted. Already, Fed minutes in May had set the cat among the pigeons, with volatility surging, as markets tried to work out what the Fed’s next move would be. When it did come, it was as if Mr Bernanke had sprung a surprise on everyone.

All he has said was that the Fed would look to begin easing off QE3 in the latter part of 2013, but to judge from the reaction he might have said it would all come to a stop by September. The FTSE 100 has lost around 800 points from its May peak, and the 6000 level looks under threat for the first time this year.

Meanwhile, in China, the People’s Bank of China has got in on the act, saying that it would keep credit conditions tight in a bid to reduce excess liquidity. This has raised the prospect that Chinese growth may not be as strong as previously hoped, removing one of the key confidence props for investors. The sell-off in commodities has begun anew, with copper threatening to fall through $3 per pound.

The US versus the eurozone

However, there are reasons to be positive when it comes to the US economy. After all, the Fed wouldn’t even begin to be thinking about easing off on QE3 if there were not signs of life in US economic activity. The improving condition of the world’s largest economy is a reason for hope, not despair, despite the rather panicked reaction in equity markets.

However, once again the eurozone is issuing troubling noises. An Italian bank has said that Rome may be forced to seek financial assistance within months, as bond yields rise and companies see their credit conditions deteriorate. The lack of ECB action over the past few months has been a worrying sign that the eurozone’s chief guardian of financial stability is asleep at the wheel. If they do not act we could be in for yet another chapter in Italy’s long saga.

New world ahead for sterling

As we look into July, a key moment arrives for the UK, namely the arrival of Mark Carney as governor of the Bank of England. The weight of expectations surrounding his incumbency is heavy, but it seems likely he will try to restart some form of easing. This will lead to the unlikely spectacle of the Bank easing while the Fed looks to tighten.

Spot FX GBP/USD (DFB) chart

Meanwhile, IG clients expect further falls in the value of the pound against the US dollar. Data shows that clients are net 64% short on GBP/USD, indicating that they think Mark Carney will look to make some major changes when he begins his tenure at Threadneedle Street.

GBP/USD client sentiment chart

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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