Sterling claws back some ground - but is it just a pause?

Sterling clawed back some ground against the dollar and euro on Tuesday after a historic plunge of 11 per cent following last week’s British vote to leave the EU, but analysts said this was merely a pause rather than the start of any upward trend.

The pound’s rise of as much as 1.2 per cent against the dollar would under normal market conditions be considered a decent rebound. But the move seemed relatively modest in the context of the currency’s biggest fall in modern history, to a 31-year low, after Thursday’s Brexit referendum.

Sterling fell about 7 per cent on Friday alone -- its steepest one-day decline in the post-1973 era of floating exchange rates. On Tuesday, the highest it hit was $1.3421, still more than 16 cents lower than where it was trading before the referendum results started to be announced.

“We’ve had two days of massive sell-offs so this temporary reprieve is not unexpected, especially as we’ve had no new news -- I think that’s key,” said ING currency strategist Viraj Patel. Investors also pointed to a move in expectations on interest rates from the US Federal Reserve as underpinning sterling.

Markets are now pricing in a 7 per cent chance of a rate cut in July and an 18 per cent chance of one in September, and they have totally priced out a hike until at least December, according to CME FedWatch.

“Janet Yellen could not bring herself to raise rates when the conditions were perfect for it. She is not going to do it now,” said Millennium Global portfolio manager Richard Benson.

Equities

World stocks rose for the first time in three days and sterling and the euro climbed on Tuesday, as investors made a rush for Brexit-bashed assets hammered by some of the biggest falls since the 2008 collapse of Lehman Brothers. US stocks opened firmer, following the lead set in Europe, though gains were limited withthe Dow Jones Index gaining around 1 per cent by late afternoon European time.

Bargain hunting trumped still widespread uncertainty over Britain's vote to leave the European Union, as the bloc's leaders, including soon-to-be-ex UK Prime Minister David Cameron, held their first post-vote meeting in Brussels. Wall Street shares were expected to bounce 1 per cent when the market reopens, as European shares clawed back 2.4 percentage points of the 10 per cent they lost in the wake of the UK's vote in favour of Brexit on Friday.

Banks and insurers, which have suffered the most in the rout, led the fightback. Britain’s Lloyds and Barclays jumped 5 and 4 per cent, Deutsche Bank climbed 2 percent, Credit Agricole and Italy’s UniCredit were up 5 per cent and Spain’s Bankia surged 9.5 per cent.

Bonds

Risk appetite was also beginning to resurface in bond markets. Yields on UK government bonds, known as gilts, and German bunds nudged up having both hit record lows since the Brexit vote, while yields in lower rated Spain, Italy and Portugal all fell more than 8 basis points. The move in gilts also came after rating agency Standard and Poor’s stripped the UK of its prized AAA rating with a hefty two-notch downgrade. It was the first time it had ever made such a deep cut to a top-rated sovereign.

Gold

Gold fell more than 1 per cent on Tuesday as buyers cashed in gains from the biggest two-day rally since late 2008. The metal jumped to its highest in more than two years at $1,358.20 an ounce on Friday, and to more than three-year highs in euro and sterling terms, but quickly retreated from that peak.

Spot gold was down 1.2 per cent at $1,308.96 an ounce at 1150 GMT on Tuesday, with US gold futures for August delivery down $12 at $1,312.70.

Reuters