Pound, commodities snap post-Brexit slides on stimulus optimism

A customer with his sterling pound bought from a money changer at The Arcade on June 24, 2016.
A customer with his sterling pound bought from a money changer at The Arcade on June 24, 2016.ST PHOTO: KEVIN LIM

HONG KONG/SYDNEY (BLOOMBERG) - The pound strengthened for the first time since Britain's shock vote to leave the European Union and commodities advanced amid signs policy makers are taking steps to limit the economic fallout. US and European stock index futures rallied as Asian stocks erased losses.

Sterling gained after plunging a record 11 per cent over the last two sessions, while a gauge of the US dollar's strength snapped its steepest rally since 2011.

The Bloomberg Commodity Index rebounded from a three-week low as oil climbed to about US$47 a barrel and industrial metals rose.

The MSCI Asia Pacific Index were little changed, after earlier sliding as much as 1.2 per cent. Benchmarks declined in Hong Kong and Australia, while Singapore, South Korea and Taiwan posted gains. Japan's Nikkei 225 Stock Average rose 0.1 per cent, after earlier falling as much as 2.1 per cent.

Futures on the S&P 500 Index rallied 0.9 per cent, while those on the Euro Stoxx 50 Index jumped 1.9 per cent. Contracts on the UK's FTSE 100 Index were up 1.3 per cent.

A US$17 billion fiscal stimulus package boosted shares in South Korea, while Japan's were buoyed by a newspaper report saying an extra budget has been proposed. Sovereign bond yields plumbed new lows in Australia, Japan and South Korea as futures indicated that the next move in US interest rates is now likely to be a cut.

"We are probably going to have looser policy settings than before the vote," Tim Schroeders, a Melbourne-based portfolio manager at Pengana Capital, who helps oversee about US$1.2 billion in assets, said by phone. "You'd have to suspect that the bias is to the downside for global growth and as a result that stimulus remains in light of increased uncertainty."

Britain's vote to secede from the EU wiped almost US$4 trillion off the value of global equities, with investors selling riskier assets amid concern trade snarls and political upheaval would disrupt the already-fragile global economic recovery. Fed Funds futures indicate there is now a 9 per cent chance the Federal Reserve will raise interest rates by February and a 20 per cent likelihood of a cut. Prior to the UK's referendum, there was zero prospect of a reduction and a 52 per cent probability of an increase.

EU leaders will gather in Brussels on Tuesday for the start of a two-day European Council summit to discuss Britain's decision to leave the bloc.

The pound strengthened 0.4 per cent versus the dollar as of 7:09 am London time, supported by technical indicators that suggested losses since Thursday's vote were excessive. The move comes even after the UK was stripped of its top credit grade by S&P Global Ratings, and Fitch Ratings also lowered the country's rank.

The yen added 0.1 per cent, after surging more than 4 per cent over the last two sessions. The Bloomberg Dollar SpotIndex retreated 0.4 per cent, following a two-day jump of 2.7 per cent.

"After such huge market swings since Friday, currencies are undergoing a bear market rebound and the dollar is part of that move," said Masafumi Yamamoto, chief currency strategist in Tokyo at Mizuho Securities Co. "This is just temporary as markets are still facing the aftershocks of the Brexit outcome. There is no additional information on what will happen, so there's no change in the fundamental situation."

The currencies of commodity-exporting nations rallied, with the Australian and New Zealand dollars gaining at least 0.9 per cent versus the greenback and South Africa's rand climbing 1.3 per cent. South Korea's won rallied 1 per cent as most emerging-market currencies strengthened.

The Bloomberg Commodity Index gained 0.8 per cent. Crude oil added 1.5 per cent to trade at US$47 a barrel in New York, while copper and nickel were up 1.3 per cent in London.

Gold slipped 0.5 per cent, after jumping 5.4 per cent in the last two sessions, its steepest rally since January 2009.

"Those sorts of spikes tend to be followed by a form of retracement, and that's what were seeing," David Lennox, resource analyst at Fat Prophets, said from Sydney. "We're not saying that the uncertainty and the safe-haven aspect of Britain pulling out of the EU is over yet. So there's still going to be some potentially good upside for gold."