Stocks, pound unchanged as UK’s exit paralyzes global markets

BLOOMBERG

A week after Britain began voting to leave the European Union, global markets are still being dominated by the consequences.
There are signs the tension is easing: The pound held steady after former London Mayor Boris Johnson said he won’t run to succeed David Cameron as U.K. Conservative Party leader, offering the chance of a smoother transition of power. European stocks were little changed, having recovered about half their losses since Britain’s EU referendum, while emerging-market equities advanced. And the sterling corporate bond market reopened, with the first offerings since the U.K. voted to leave the EU.
Central bank pledges of support have helped to contain the fallout from the Brexit decision allowing global equities to recoup more than half of the $4 trillion of market value wiped out over Friday and Monday. But gains have been limited as political upheaval in the U.K. prevented the country from entering talks to determine its future relationship with the EU. It’s also the last day of trading for the second quarter, further complicating the immediate outlook for markets.
“Now we’re in the stage where we don’t know where to go forward,” said Peter Dixon, global equities economist at Commerzbank AG in London. “We’ve walked into a huge right hook which nobody saw coming and businesses haven’t had enough time to plan for a Brexit. Now the clock starts ticking and only when companies start saying exactly what their plans are will investors be able to price Brexit properly.”
The pound was little changed at $1.3429 at 8:04 a.m. New York time. The Stoxx Europe 600 Index was 0.1 percent lower, having earlier declined as much as 0.9 percent. The FTSE 100 slipped 0.2 percent after late Wednesday erasing its post-Brexit losses and returning to its highest level since April. The vote for Brexit has dominated trading in the final quarter of 2016.
The British pound is headed for a 6.4 percent loss, its worst since the 2008 financial crisis; the real and the yen are the quarter’s best-performing major currencies. Global stocks fell 0.8 percent for a second consecutive quarterly decline, with the Stoxx 600 headed for a 3.4 percent drop The cost of insuring high-yield corporate bonds in Europe against default jumped 71 basis points, the most in absolute terms since the fourth quarter of 2014 The yuan is heading for its worst quarter on record The Bloomberg Commodity Index is set for its best quarter since 2010, rallying 13 percent as surpluses shrank in some commodities Oil headed for the biggest quarterly surge since 2009 and zinc is set for its best quarter in almost six years.

Currencies
The pound is showing signs of stabilizing after two days of gains, with Johnson’s decision paving the way for former Brexit ally Michael Gove to compete for the job with Home Secretary Theresa May.
“Johnson’s announcement removed one layer of uncertainty from a very difficult political situation,” said Jane Foley, a senior currency strategist at Rabobank International in London. “That makes it more likely that May will get the support. It suggested that rather than having a political battle, it will be a much smoother transition to new leadership. That is pound positive.”
The currency is still about 9.7 percent lower than the day of Britain’s EU vote. The yen was little changed at 102.74 per dollar, set for a 7.8 percent advance in June.
Emerging-market currencies were mixed, with South Korea’s won rising 0.7 percent as factory output data beat all forecasts in a Bloomberg survey. Russia’s ruble was the biggest losers, dropping 0.9 percent as oil declined.
The yuan fell 0.1 percent in onshore trading on Thursday and is down 3 percent in the quarter, its worst performance on record. It dropped as much as 0.26 percent earlier after Reuters reported that China’s central bank is prepared to allow a drop to 6.8 per dollar this year. Mizuho Bank Ltd. described the target claim as not “so plausible,” saying that the yuan’s weakness against a trade-weighted gauge gives the PBOC little reason to depreciate against the dollar.
In a statement on its website, the People’s Bank of China said that some media reports were “misleading” and disrupted normal foreign-exchange trading. The yuan doesn’t have the fundamentals for depreciation in the long term and China will keep the currency basically stable, it said.

Stocks
Royal Bank of Scotland Group Plc fell 5.8 percent as Morgan Stanley downgraded the U.K. lender to the equivalent of hold. Deutsche Bank AG fell 3.2 percent after failing annual stress tests conducted by the Federal Reserve. Banco Santander SA, which also fell short of the Fed’s requirements, slipped 2.2 percent.
Futures on the S&P 500 were little changed, after U.S. equities posted their biggest two-day advance in four months. Federal Reserve Bank of St. Louis President James Bullard is due to speak Thursday in London and may shed light on the U.S. interest-rate outlook after futures indicated the next increase is unlikely to come before 2018, having at the start of this month priced in a 53 percent chance of a move by July. Data on initial jobless claims and the Chicago Purchasing Manager Index are scheduled for release Thursday.
Taiwan’s central bank cut its benchmark rate at a monetary policy review, while Mexico’s is seen raising borrowing costs, according to a Bloomberg survey.
The MSCI Emerging Markets Index climbed 1 percent, extending a three-day rally amid speculation central banks will take steps to support the global economy and that the Fed will keep rates lower for longer. This week’s gains lifted the gauge to a 2.8 percent advance in June.
The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong jumped 1.7 percent, narrowing its first back-to-back quarterly loss in three years to 3.2 percent. Hong Kong’s markets will be closed on Friday for a public holiday.

Commodities
The Bloomberg Commodity Index slipped 0.2 percent.
Crude oil fell 1.6 percent to $49.06 a barrel in New York, after jumping by almost 8 percent over the last two sessions as data showed U.S. stockpiles are declining. Goldman Sachs Group Inc. said the price may slip below its $50 forecast in the second half of 2016 because of a ceasefire between militants and the government in OPEC member Nigeria.
Gold was little changed after falling as much as 0.5 percent. Nickel and zinc advanced in London, while copper was steady after earlier touching an eight-week high.
Corn in Chicago rose 0.4 percent before the U.S. Department of Agriculture updates its quarterly reserve estimates on Thursday. U.S. corn inventories as of June 1 probably rose to a 28-year high for the date, while soybean stockpiles jumped 33 percent to the most for the second quarter since 2007, according to analysts surveyed by Bloomberg. Wheat supplies probably advanced 31 percent to the highest since 1988 for the date.

Bonds
Treasuries due in a decade rose, pushing the yield one basis point lower to 1.51 percent. Similar-maturity German bund yields added one basis point to minus 0.11 percent.
The average yield on investment-grade corporate bonds in euros dropped to 0.9285 percent on Wednesday, the lowest in Bank of America Merrill Lynch index data. Borrowing costs have fallen since the European Central Bank pledged in March to buy corporate debt as part of stimulus measures to spur growth in the euro region.
British American Tobacco Plc and Brown-Forman Corp., the maker of Jack Daniel’s, were both selling notes in pounds, according to separate people familiar with the offerings, who asked not to be identified because they aren’t authorized to reveal the information. Italian government bonds were little changed after the nation auctioned 6.75 billion euros ($7.5 billion) of debt securities.
Spanish bonds snapped a rally that had been driven by an election result putting Mariano Rajoy on course for a second term as prime minister. A euro-area-wide report on Thursday will show consumer prices stopped falling in June, according to a Bloomberg survey of economists.
Italy’s 10-year bond yield was at 1.36 percent, after sliding 19 basis points in the previous three days. Spain’s 10-year yield was at 1.26 percent.