The BREXIT referendum occurs on the 23rd of June, causing uncertainty in the markets as to whether the UK will leave or remain. The current polls are split, with the Economist showing 39% for leave, 39% for remain, with 12% undecided. UK history suggests tight races are often resolved by the undecided voting for the status quo (see Scotland).
The tight referendum race is spilling over into the markets. The USD/GBP fell from 1.477 at the beginning of the year to a low of 1.386 on the 28th February, following Boris Johnson’s announcement to join the leave EU campaign. Since then the Pound has fluctuated from 1.40 to 1.45, providing those with a keen eye the opportunity to trade on the volatility. However most market participants have decided to hedge against Pound movements in the short term, with options prices reaching six-year highs.
Filtering into the Pound is also the news of rising inflation (+0.5%) in March, and while yearly inflation will likely remain below 1% it shows steps in the right direction. The Bank of England decided in April to keep base interest rates at 0.5% and the Asset Purchasing Facility at £375 billion.
A look into the research teams at the banks suggests advice is fairly muted, investors at UBS have decided to remain neutral on GDP/USD, due to the uncertainty.
On Sunday 17th April OPEC meets with Russia in Doha to discuss oil production. The results of the talks could see a freeze in the amount of oil being supplied to the markets. Oil has fallen in price in the build-up to the meeting (a rise would have rationally been expected), because OPEC member countries were found to be increasing supply in anticipation that if a freeze is decided, their production will be capped at a higher level.
The key issue here is Iran. Saudia Arabia say they will not vote for a freeze if Iran does not follow suit. Traders and financial analysts aren’t particularly confident in a deal, Iran and Brazil have both said they won’t cap their production and they are seeing the biggest gains in output this year.
Figure 1 shows Crude oil has in general seen fluctuated movements since the beginning of the year. Falls in January were caused by an overreaction to the Chinese slow down, and the current upward trend suggests a more fair equilibrium is being reached.
Updates on the talks can be found here.
It has entered earnings season for banks:
- Wednesday 13th April: JPMorgan.
- Thursday 14th April: Bank of America, Wells Fargo
- Friday 15th April: Citigroup
- Monday 18th April: Morgan Stanley
- Tuesday 19th April: Goldman Sachs
These results were, and are, anticipated to be poor. The first quarter of 2016 has seen falling oil and commodity prices, placing pressure on loans made to the oil & gas and mining sectors. Furthermore interest rates remain low in the USA, Europe, Japan and the UK, resulting in low net interest income for the banks.
JPMorgan‘s results came out last Wednesday and they showed profits falling 6% and revenues falling 3%. However earnings per share were above analyst expectations at $1.35 a share versus $1.26. This resulted in a JPMorgan share price rally of +5.58%. The earnings report did however highlight cost cutting, in light of non-performing loans from the shale, oil and gas sector. Furthermore JPMorgan cut 5% of jobs in the wealth management team based in Asia-Pacific, as they increase their investment threshold form $5 million to $10 million.
Bank of America also saw a drop in revenue and profit, most notably in the FICC trading sector, which saw revenue fall 17.5%. Earnings per share were $0.21 vs expections of $0.20. BofA, which is one of the biggest lenders to oil & gas, also increased provisions for lending by +30% to $997 million this quarter, as they anticipate losses on their energy loan book.
Wells Fargo‘s profits fell 5.9% due to the poor performance of energy loans. Its share price remained stable as earnings beat estimates by $0.02 ($0.99 vs. $0.97) and revenue rose 4.3%.
Citigroup saw earnings beat estimates, with $1.10 earnings per share to the expected $1.03. However consistent with the other banks they saw a 27% decline in profits for the quarter, with a 6% decline in revenue.
Morgan Stanley and Goldman Sachs will probably produce results in line with the above. The focus will be on FICC trading and M&A figures, as well as the wealth management businesses. Goldman Sachs has already hinted at poor trading and M&A figures after announcing cost-cutting for its employees.
Another bank making the news is Nomura, who announced it was shutting down its European equity business. This follows the bank’s strategy to cut costs in underperforming parts of their business. Their European operations were originally purchased from Lehman Brothers.
The Bank of Japan has embarked on a journey of quantitative easing and negative interest rates, however the market seems to be taking a different course and acting as if rates are being hiked. The Yen has appreciated +5.1% (113.59 to 108.04) in the 10 days from the end of March to the 10th of April.
The reason for this originates from the Yen traditionally being targeted as a safe haven currency, due to a large trade surplus and, of course, market participants following each other. This is causing headaches for Shinzo Abe, who is trying desperately to get the economy back on track after decades of sluggish growth and deflation. A stronger Yen makes this process harder, as Japanese exports become more expensive.
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