Sterling down, markets up

Who would have thought back in the dark days of February, if you had suggested that 6 months later the FTSE 100 would be bearing in on a record close. Even more so if you had a been warned that the leave campaign would win in June. This rally is coinciding with moves in the pound, this week in particular as Theresa May effectively sounded the Brexit starting pistol, and the pound falls to 30 year lows against the US dollar. As the stock market climbs, sterling falls and the economic data continues to be robust. Monday’s manufacturing PMI, as was the case in the previous month beat expectations.

There is often speculation by economic commentators about countries trying to enter into competitive devaluation of currencies to help boost their economy. The Japanese, Americans and Europe have all been accused of this in the past few years. Some European countries must be looking at the impact we have seen to the economy and the stock market, post the decision to leave Europe and at least in the short term part of them must wish they too could get the same option.

We do reiterate about this, but as every day passes one does feel Mark Carney will, with hindsight look back and see the Brexit hours were not his finest. Waiting until the dust settles and then acted would have been far more prudent. If the pound keeps falling, he could well be forced to reverse Augusts actions.

 The start of the month sees the release of the results of the previous months Purchasing Managers surveys from around the globe. We had mentioned that these data points, which many consider are a lead indicator for future economic growth, had been ticking higher in the previous months. September seems to be confirming this trend, so far.

As usual we get various members of the Federal Reserve handing out their thoughts on the current interest rate policy. Sometimes, ahead of meetings these statements can have some market impact. The danger is possibly that as actions have not matched words this year from the Fed, investors may now discount comments.

On Tuesday Richmond Federal Reserve president Lacker, said there was a strong case for raising rates arguing that there may be the need for several rate rises to keep pace with inflation. Lacker believes economic history suggests rates should be about 1.5% higher than they are currently.

The banking community has been rallying around Deutsche Bank at the start of this week, JP Morgan’s Jamie Diamond expressed the view that Deutsche Bank will get over its problems. He believes they have plenty of “capital and liquidity”.  These comments did seem to help the shares have a small rally on Tuesday. 

Posted on October 4, 2016 .