Daily Market Update: Brexit beckons?
The latest set of opinion polls for the UK’s forthcoming EU referendum was the key event within financial markets yesterday.
Online polls carried out by ICM and YouGov for the first time gave leads of four and five percentage points to the campaign for Britain to quit the EU. Sterling bore the brunt of the price action on the currency markets yesterday. EUR/GBP briefly touched 79p before yesterday’s European session opened but has moved back towards 78p this morning. This compares with 77.3p prior to the release of Friday’s disappointing US nonfarm payrolls report. Cable has been on a roller-coaster ride in recent days and almost touched $1.435 yesterday before the European session began. GBP/USD is back at $1.455 as I write. EUR/USD is currently changing hands at $1.137, this compares with $1.115 prior to Friday’s nonfarm payrolls report.
Financial markets continue to mull over the health of the US labour market. Following Friday’s nonfarm payrolls report, yesterday’s latest Labour Market Conditions Index from the Fed also came in weaker than expected. The composite measure of 19 monthly indicators has been deteriorating since last October and last month hit its lowest reading in 7-years. Financial markets also focussed on a speech by Fed Chair Janet Yellen yesterday. Most of the speech was centred on whether the very weak May employment report, which, coupled with global uncertainty stemming from the UK referendum, takes a June hike off the table.
Last Friday’s nonfarm payrolls report was a big data miss with a net gain of just 38k jobs last month. This was well below the 160k expected by analysts and represented the smallest gain since September 2010. What’s more, the initial estimates for March and April were revised downwards by 59,000. There were mitigating factors; a strike at the telecoms company Verizon knocked 35,000 off the total. But add them back and this would still have been a disappointing report. Even the apparently good news of a fall in the unemployment rate was mixed at best. That drop was caused most by people giving up looking for work. While Janet Yellen said two weeks ago that she expected an interest rate move “in the coming months” she did not repeat those words last night and gave no clear indications in her speech as to the likely timing of the next move. Meanwhile St. Louis Fed President James Bullard (voter) confirmed to the Wall Street Journal that it's a "fair assessment" that the chances of a June rate hike are now much lower. Following a weak jobs report last Friday, Bullard told the Journal that he would rather the Federal Reserve raise rates on the back of positive economic news.
Turning to the Eurozone, there was a bigger than expected decline in German industrial orders in April. Orders fell by 2% m/m in April which was the biggest decline in 9 months. This decline concealed contrasting fortunes between domestic and external orders. The former actually rose by 1.3% last month but was more than offset by a 4.3% fall in foreign orders. This morning we have seen a pick-up in German industrial production figures for April. However, the forward looking orders indicator, discussed previously, suggests this growth is unlikely to be sustained. The final Eurozone GDP figures for Q1 are due shortly with no change in the anticipated 0.5% q/q growth rate expected. While politics is centre-stage within the UK, it is worth noting political developments within the Eurozone. Over the weekend in Italy, the anti-establishment Five Star movement polled well in local elections. Similarly in Spain, the anti-establishment Podemos party is polling well in opinion polls ahead of the general election that takes place on 26th June. Today’s economic calendar is very light with financial markets remaining sensitive to any UK EU referendum related news.