Summer calm in the financial markets - for now at least
THE financial markets have settled down into the summer doldrums after the initial shock of the vote by the UK to leave the EU. The stock markets have fully recovered their post-Brexit vote losses, while bond yields have been confined to narrow ranges recently.
Sterling has also found a footing, with the UK currency trading in tight ranges against both the US dollar and the euro ($1.31-$1.33 and 83-85p).
For the moment, the financial markets have become very becalmed in light summer trading, helped by some good data on the US and eurozone economies over the past month.
And there is likely to be further good news for markets in the remainder of the week, with expected policy easing from the Bank of England and Reserve Bank of Australia. Meanwhile, another solid employment report is being predicted in the US which should help settle nerves about the prospects for that economy, following its soft patch in the first half of the year.
However, it is doubtful that we have seen the last of the fall-out for markets from the UK referendum result.
Early UK survey data for July point to signs of a shock to the economy in the aftermath of the Brexit vote. We may well see a string of weak data on the UK economy over the next couple of months which could prompt the Bank of England into a series of easing moves.
It is also possible that we could see difficulties arising later in the year in the preliminary negotiations between the EU and UK on Brexit. Thus, there remains considerable downside risks for sterling over the balance of the year. The current sense of calm on markets may not last too long.
In the week ahead, the main event is that meeting of the Bank of England Monetary Policy Committee (MPC). After teeing itself up in July, the financial markets now expect the MPC to announce policy easing measures. The consensus forecast is that the UK base rate will be cut to 0.25 per cent from 0.50 per cent
Markets will also get a clearer view of the likely future direction of monetary policy, and the outlook for the UK economy, with the publication of the August inflation report and MPC minutes along with a press conference from Bank Governor Mark Carney.
The inflation report is likely to show downgrades to the outlook for GDP. However, higher prices, as a result of the sharp fall in sterling, are expected to see inflation revised up, reaching its 2 per cent target more quickly than had previously been anticipated.
Recent comments from the Bank of England, though, have focused more on stabilising the UK economy than on price pressures. Overall then, the Bank looks set to ease policy this week, while also adopting a yet more dovish tone, emphasising its ability to ‘do more' if needed.
The main economic data release of the week comes in the US on Friday, where we get the July employment report. The key non-farm payrolls number is forecast to increase by a solid 180,000, following on from June's much improved 287,000 result.