Key News
* Bank of England Voted 9-0 to Continue Money-Printing Program (Bloomberg)
*UK Unemployment Rises Less Than Economists Forecast (Bloomberg)
*U.S. Consumer Prices Rose Less Than Forecast in May (Bloomberg)
The Event Agenda
The Morning Run-Down
After some whipsaw action in currencies yesterday, the currency markets, stocks, commodities and interest rates are back on path, showing more confirmation this morning that a deterioration of risk appetite is underway. The pound made a strong move higher yesterday on some slightly hotter inflationary data. But today’s Bank of England minutes disclosed the unanimous vote to stay the course with zero-like rates (50bps) and additional stimulus measures, indicating the BOE is very concerned about the downside risks and not overly optimistic about the sustainability of the small improvements that have made in the economy. That brought the pound back down to earth quickly.
But news is not really driving markets right now—it’s more a matter of risk, giving way to risk aversion. There have been key technical breaches in currencies, commodities and stocks that support the argument that risk aversion is returning. And volatility is suggesting the same. The VIX, the gauge of what stock market participants are paying for protection, is breaking higher. And Credit default swaps on sovereign debt have been rising briskly. See the charts below of more details…
Key Charts
The clean break of the trendline that represents the entire move from the March lows in the S&P 500 has resulted in 30 S&P points– thus far.
And volatility is picking up across markets and that’s a sign that risk appetite is waning and protection is being sought.
Credit default swaps on soveriegn debt are starting to move aggressively higher. This chart shows the recent bounce in the UK CDS market (in white) implying increased perception of risk. And it shows the relationship credit default swaps have had with the pound (which is shown inverse in this chart in green). This spike in UK CDS market could be a precursor for a steep fall in the pound (rise in this inverse chart).
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