Sterling, most stock benchmarks and bond yields, are modestly firmer as investors display cautious optimism ahead of the UK’s EU referendum and await fresh guidance from the Federal Reserve.
The market’s tentatively positive tone comes after risk assets globally on Monday posted solid gains following polls showing voters in favour of the UK leaving the EU had lost some of their lead over the Remain camp.
Investors in recent weeks have been fearful that a “Brexit” would harm an already weak European economy and potentially trigger further political uncertainty across the region.
But the “remain rally” is much less ebullient on Tuesday.
The British pound, which surged 2.4 per cent in the previous session, its biggest one-day gain since December 15, 2008, is up another 0.1 per cent to $1.4701, shrugging off famed investor George Soros’s warning that sterling could fall sharply in the wake of a “Brexit” vote.
Market watchers still think trading in the lead-up to the June 23rd referendum will be volatile.
“Until the results of the vote come through late on Thursday, trading will continue to be dominated by the increasingly frequent opinion polls that will appear this week,” said Sean Keane at Triple T Consulting.
“These tape bombs will diminish liquidity, cause trading spreads to widen and will ensure that risk appetite will remain a function of the political polls. The sooner Thursday comes around the better.”
Indeed, a new poll on Tuesday showed the two camps pretty much neck and neck and this has caused sterling to pare earlier gains.
The cost of hedging against volatility in the sterling/dollar exchange rate over a seven-day period remains highly elevated at 38.3 per cent. The measure has averaged 9.1 over the past 12 months having hit a record of 47.9 last Friday.
The mood in UK equities is also muted. The FTSE 100 is down less than 0.1 per cent after surging 3 per cent at the start of the week, though the Euro Stoxx 600, which bounced 3.7 per cent, is up another 0.6 per cent as banks rally again.
Part of the reason for the relatively meek advance in London is a lack of traction in energy stocks as Brent crude dips 2 per cent to $49.63 a barrel.
Advances
On Wall Street the S&P 500 is advancing 0.2 per cent to 2,086 in mid-morning trade as investors turn their attention to Federal Reserve chair Janet Yellen’s semi-annual testimony to Congress in the US later on Tuesday.
Ms Yellen struck a cautious note, saying she would tread carefully in gauging when to lift official short-term interest rates again as the central bank assesses whether the recovery remains on track and the jobs market is still improving.
“A rebound in [US]payrolls growth in June and a clear UK vote to remain in the EU could yet persuade the Fed to raise rates in late July. At this stage, however, a further short delay until September appears more likely, followed by another rise in December,” reckon analysts at Capital Economics.
US 10-year Treasury yields are up 1 basis point at 1.68 per cent - unchanged from where they stood before Ms Yellen’s speech was published. Equivalent maturity Bunds, which last week fell into negative territory amid European Central Bank bond buying and “Brexit” worries, are 1bp softer at 0.05 per cent. UK gilts are up 3bp to 1.27 per cent after the government’s borrowing was higher than forecast in May.
The US dollar index, a measure of the US currency against a basket of global peers, is up 0.4 per cent at 93.98.
Gold, which is sensitive to the buck and US interest rate expectations, and which last week hit a 22-month high of $1,315 amid the burgeoning Brexit fears, is down $23 to $1,266 an ounce.
Earlier in Asia, most bourses followed Europe’s upbeat Monday mood. Japan’s exporter-sensitive Nikkei 225 gained 1.3 per cent after the “haven” yen weakened, now off 0.6 per cent to ¥104.52 per US dollar.
Australia’s S&P/ASX 200 rose 0.3 per cent, Hong Kong’s Hang Seng was up 0.8 per cent but mainland China’s Shanghai Composite slipped 0.3 per cent.
– Copyright The Financial Times Limited 2016
