Ger30, UK100 and SP500 are CFD’s, written over the Dax30, Footsie100 and S&P500 Index futures:
In the pre-opening, European equities showed some gains. The initial rise is explained by two factors. The first is a technical reaction to the strong losses in recent days. The second is that the financial markets apparently interpreted positively the suspension of the referendum campaign. In fact, when this decision was announced by the Prime Minister there has been an appreciation of the pound which led to a recovery of stock markets. The recent volatility resulting from the uncertainty that dominates the current environment, may suffer a further increase due to the expiration of futures and options contracts. Derivatives are often used by investors to protect their portfolios from a potential drop in the market. Because of the uncertainty that dominates the current environment, the volume of derivatives increased significantly, by the maturity of today may be more intense and volatile than usual. The most critical moments are the time between 10h50 and 11h00 (futures and options expiration on Eurostoxx50) and 12h00 (futures and options on the DAX 30).
US markets closed higher, after a pressured begin by weakness in European and Asian markets. Yesterday’s recovery seems to be more a technical reaction to previous falls than actually a reversal of investor sentiment. In fact, we were able to see some profit taking in several haven assets (such as the yen, gold and state obligations) and the selling positions in risky assets such as shares. Despite this movement uncertainties remain. Investors will continue to react to economic data, trying to anticipate what may be the decisions of the Fed. But this pattern has become more complex from the time the Fed began to give greater importance to the behavior of financial markets. In December 2015, the Central Bank increased interest rates by 0.25% and announced that four new estimated increases in 2016. However, due to the turmoil in the financial markets these expectations of the members of the Fed declined. After the good performance of stock markets in February and March, members of the Central Bank estimated at the time, two to three increments, and can start as early as June. Now, given the risks (more in financial terms than economic) posed by the referendum in the UK (and also due to the uncertainty of the economy), the Fed back to delay an increase in interest rates. In short, it formed a circular relationship between the Fed and financial markets which resulted, at least so far, an uncertainty that both parties try to guess each other’s behavior. In this regard, to notice that yesterday the inflation measured by consumer prices, increased 0.2% in May, slightly lower than the 0.30% estimated by economists. In annual terms, inflation stood at 1%. Excluding the most volatile goods inflation increased in annual terms 2.20%, due to the significant rise in the cost of medical services and property rentals. On the other hand, the number of unemployment benefit applications reached 277,000, up from 270,000 expected. But the business activity index of the Philadelphia Fed stood at 4.70 in June, up from estimated 1.00. On the housing market, the NAHB Housing Market Index stood at 60.0, slightly above the forecast of 59.0. Today, as in Europe, will expire futures contracts and options called quadruple witching, which shall cause a much higher than average volatility and the occurrence of erratic movements. Nowadays, the most sensitive time 13h30 (opening) and 18h00.
Asian shares closed higher after good Wall Street performance. In Japan, this effect was reinforced by the words of Prime Minister Shinzo Abe expressed which showed concern about the “movements in one direction we have observed in the foreign exchange markets.” These statements referred to the appreciation of the yen against major currencies and was interpreted by investors as a warning to the market that Japanese authorities may intervene to curb this movement.