05 July 2016 at 11:14 GMT
Risk aversion across European equities continued on Tuesday, with GBP at new post-Brexit lows. One prime example was Italy’s Banca Monte dei Paschi which tumbled 9.6% as reports emerged about a possible capital injection plan into the troubled bank.
The Bank of England's Stability Report was another early-session highlight with officials pledging to "take further action if needed".
The bank's governor, Mark Carney, said the GBP drop should support exporters and he declared that he would support jobs and growth in these uncertain times.
- US May Factory orders (-0.8% exp.) (1400 GMT)
- US May Final Durable Goods (-2.2% exp.) (1400 GMT)
GBP is the main mover in Europe today, with supply of sterling vs majors ahead on the Bank of England's Stability Report and governor Mark Carney’s potential dovish tone in the ensueing press conference led to heavy losses. Cable broke below 1.3200, while EURGBP worked its way through resistance levels at 0.8400 with move quickly turning into one way GBP selloff. New 31-year lows in cable was reached at 1.3117. GBPJPY initially held the break below 135.00 at around 134.75 but a failed attempt to recover back above 135.00 saw the pair work through support levels until bids at 133.30 were filled.
EURUSD was well supported, helped by demand in EURGBP and weaker US yields with the 10-year reaching new lows 1.3810%.
FX Options volatilities
We're seeing vols trading higher in today’s session, with a bit of risk-on sentiment in the market. Main data this week are the US nonfarm payrolls. However, we do not see much volatility priced into this event, with fwd o/n (7-8jul) vol in EURUSD at 14.5%, which is not a lot over o/n and 1w historically.
Risk sentiment is reversing and bunds are catching a bid to challenge the all-time low in yield terms, which was set on the opening bell post Brexit at -0,17%. Italian government bonds (BTP) are underperforming, but only marginally with the 10-yr spread to Germany just 4 bps wider for the session – presumably on the anticipation of European Central Bank assistance to solve the banking sector meltdown. Corporate bonds seen a touch weaker in tone with the sentiment change with a 10 bps expansion in XOVER, however an improvement from earlier trading has been seen so far.
European markets are trading lower with EuroStoxx 600 down 1.30% on light volume. A number of sectors are being hit this morning with miners, banks and homebuilders suffering the most. Commodity prices have slipped today dragging with it miners and related names. Banks are lower as post Brexit concerns seem to be in focus again and Italy’s Monte dei Paschi fell over 9% as it’s told to shed a further €10 billion in bad loans. Homebuilders are off after Standard Life’s property fund freezes redemptions.
Persimmon, Taylor Wimpey, Berkeley Group and Redrow are all down over 3.5% after the Standard Life news and data showing Britain’s construction industry contracting the most in 7 years.
Unicredit is higher by over 4% after Goldman Sachs raised its outlook to a buy from neutral but added that they would need to raise extra capital to protect themselves from the risk of contagion should smaller lenders fail.
Mid-session Europe is part of TradingFloor's stable of commentary running through from the US close, through Asia to the European session. Click below to keep abreast of all the developments as they happen.
The last time sterling was this weak was half-way through the Thatcher years. Pic: Wikimedia
— Edited by Clare MacCarthy