Aside from the material sector on Monday equity markets overall held steady. The US dollar has staged something a recovery in the past few days and one gets the feeling that this gave the resource bears, of which there are probably still plenty, a good reason to hit prices. Considering some of the falls in commodity shares on Monday the FTSE 100 did well to finish the day little changed.
German equities were also boosted on Monday from a better than expected factory order number. Whether UK equities were supported by some reports in the weekend press that the governor of the Bank of England may look to cut rates should the referendum go for a yes vote is debatable. Many economists are forecasting a sharp fall in sterling should the Brexit vote go for a yes. We cannot see how Mark Carney could cut interest rates in that scenario. Under these circumstances he would be forced to defend the pound and not further exaggerate the fall.
According to the National Institute for Economic and social Research the pound could fall by up to 20% in the case of a Brexit. They go on to warn of a “significant” economic shock including a 0.8% hit to GDP. They go on to forecast that inflation could jump between 2-4%. This does not feel like a scenario that would allow Mark Carney to cut rates in. Economists are notoriously poor at forecasting so perhaps one should treat all of this with a fair degree of healthy scepticism. Brexit will continue to dominate the headlines, however if we believe many of the so called experts not only will a Brexit bring down the global economy, now the world’s national security would be threatened.
Greece is back on the agenda in Europe, and even those negotiations are being linked to Brexit. According to the Times fresh fears over a fresh Greek crisis could tip the vote in favour of a yes vote. These fears may have helped the Euro finance minister’s comer close to a deal that will release the next tranche of its 86bn euro bailout. Greek parliament’s vote on Sunday to introduce further austerity measures apparently helping tip the balance. The deal could include average loans being pushed out five years to 2050. The forecast is for debt to GDP to fall from the current 180%, to 105% by 2060, or could rise to 250pct of GDP or fall to 60% of GDP. Perhaps it would be easier to say they have not got a clue, but have no choice but to hand over the money.
Needless to say all this gloom and doom led to a nice rally in the FTSE 100 on Tuesday, and a good bounce in US equities. According to Bernstein sentiment for equities has reached the lows of mid February.