Markets Positive – More stimulus in the pipeline

European Markets gained more ground on Wednesday, as they have recovered more from the Brexit aftermath helped in part by the expectations of more stimulus measures from the European Central Bank and the Bank of England (BOE). Markets are expecting the BOE to cut the interest rate on Thursday for the first time in more than seven years, in a bid to calm financial markets. Apart from the U.K market effect, spreads against the bonds of troubled Eurozone countries such as Italy have been swelling, which indicates a prospect for more help and monetary easing from major central banks.

In the Banking sector, shares in the Spanish banks such as Banco Popular and Sabadell rose after the European court of Justice backed a Spanish court ruling, capping banks’ liabilities on mortgage contracts. This offered relief to banks, which feared millions in compensation.

Despite the positive scenario, oil futures extended previous losses after U.S. government reports revealed that output was higher and oil reserves fell a bit less than expectations, which pushed the oil storage to the highest level in seven years. This supply glut may threaten a price recovery.

The currency sector revealed a softened U.S. Dollar against major rivals as foreign exchange markets eased on the overreaction to Brexit and the cautious approach of the Federal Reserve to increase the interest rate. The Euro and the British Pound gained ground against the greenback trading at around $1.1088 and $1.3256 respectively. The Yen gained against the US Dollar when the government ruled out the central bank will be buying government bonds to finance tax cuts and government spending.

The recent negative market sentiment, mainly due the U.K referendum outcome has turned investors to fund fixed income and precious metals. The German government bond maturing in 2026 was at minus 0.05% yield. Deflation pressures and market instability results in investors getting less than what they initially paid for.

Meanwhile, published reports show the weakness in global demand, reduced China’s exports by 4.8% in June in U.S Dollar terms compared to the previous year. The downward pressure on exports was caused mainly due to U.S shipments, which were reduced by 9.9% and the strong U.S Dollar. Exports to the European Union also fell 4.4% in the first half of the year.

U.S markets were mixed moving in and out of the green territory, as they struggled to build upon the momentum achieved the day before, which has pushed the S&P and Dow industrials to record closing levels. The economic uncertainty caused by Brexit was a key driver to achieve these records, as the European and U.K economic uncertainty inclined investors to invest in the U.S. Record low yields and a cautious Federal Reserve were other factors, helping index prices achieve record high levels.

Disclaimer:

This article was issued by Rodrick Duca, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.