European markets stall as post-Brexit rally runs out of steam

Stock markets traded within sight of their highest levels this year, though there are signs that the strong rally of recent days may be running out of steam. European markets are flat this morning, with London and the major European markets showing little change and a small decline in the ISEQ index of Irish shares by mid-morning.

Sterling has edged up slightly to over $1.3250, well off its post-Brexit lows of $1.28, but investors are unsure about the impact of a likely interest rate cut by the Bank of England tomorrow.

The prospect of stimulative economic policy across the developed world had eased immediate concern over Britain’s vote to leave the European Union and led to a rally in equity markets kin recent days and some recovery in sterling.

The swift moves by the Conservative Party that see Theresa May replacing David Cameron as prime minister on have helped fund a recovery that, aside from sterling itself, has wiped out the negative reaction to the June 23 vote.

Asian markets outside Japan gained another third of a percent to come within a hair’s breadth of the year’s highs from April, while European shares were slightly higher on average by mid-morning.

BREXIT CONCERNS

Traders say that concerns over the economic and political impact of what promise to be torturous exit talks between London and Brussels have not gone away, but they are certainly on the back burner for a moment.

Expectations that sterling’s fall will help British companies has London’s FTSE index trading at its highest since last August.

“This is a short term relief rally thanks to some certainty around the swift handover to a new PM,” said Tobias Davis, Head of Corporate Treasury Sales at Western Union in London.

“The path ahead still looks incredibly challenging. Equities are only rallying thanks to negative yields across most of the curve in Swiss, German and Japanese markets. In reality, the economic landscape is deteriorating.”

Sterling, whose 14 percent fall made it one of the main victims of last month’s referendum, hit its highest in more than a week above $1.3350, though its gains today were limited.

The yen, investors’ go-to currency in times of market stress was also up half a percent against the euro and dollar after falling sharply on the back of Japan’s move into another round of stimulative policy.

RATE CUT

The debate among currency traders around Thursday’s Bank of England meeting is also now not whether it will cut interest rates but by how much -- some measure of the concern over the economy’s fate for the rest of the year.

“I’m struck at the enthusiasm of all and sundry to tell us that European and U.S. growth rates will hardly be affected by the UK post-referendum slowdown,” Societe Generale’s Kit Juckes said in a note to clients. “That flies in the face of the increased correlation of major economies’ growth rates in an ever more connected world.”

Reuters