Mon 27 Jun 2016

In Portfolioticker today

Today at the stock market NBR

bull/bearThe aftershocks of the U.K.’s vote to leave the European Union reverberated across financial markets after a weekend of political turmoil, with the pound extending its record selloff and European equities dropping to levels last seen in February.

The S&P 500 dropped 1.8% to the lowest since mid-Mar 2016, while the slide in Europe’s equity benchmark reached 11% over 2 days, the most since 2008. The GBP fell below Friday’s lows with a 3.4% slide to the weakest since 1985, as S&P cut its rating on the U.K.’s sovereign debt. Demand for haven assets boosted gold, and Treasury 10-year yields reached a four-year low.

Risk assets have been under pressure since Britons voted to secede from the EU, raising concerns that an already-fragile global economic recovery will falter as trade snarls in one of the world’s biggest consumer blocs. More than $4 trillion has been was wiped from global equity values as internecine squabbles flared in the U.K.’s main political parties, exacerbating the sense of instability.

The S&P 500 fell to 2,000.54 at 4 p.m. in New York, sliding below its average price for the past 200 days after Friday plunging the most in 10 months. The odds of a Fed interest rate increase by February plunged to about 10% from 52% on Thursday.

The Stoxx Europe 600 Index slid 4.1% following a 7% rout Friday. The FTSE 100 lost 2.6%. The Stoxx 600 Banks Index, which included European companies involved in banking, fell 7.7% after dropping 14% on Friday. The volume of European shares changing hands today was more than double the 30-day average.

U.K. banks were the worst performers, with Royal Bank of Scotland Group Plc losing 15% and Barclays Plc sliding 17%. Losses in Italian lenders were limited after people with knowledge of the discussions said Italy is considering injecting capital into some banks.

The MSCI Emerging Markets Index dropped 1.3%. The gauge slid 3.5% on Friday. Shares in emerging Europe and Africa were among the hardest hit, with benchmarks in Poland and South Africa falling at least 1.6%.Bloomberg

The shape of market indices today
^ Market indices today (Chart: Yahoo Finance)

Market indices

Index Ticker Today Change 31 Dec 15 YTD
S&P 500 SPX (INX) 2000.54 -1.81% 2043.94 -2.13%
DJIA INDU 17140.24 -1.50% 17425.03 -1.64%
NASDAQ IXIC 4594.44 -2.42% 5007.41 -8.25%

The portfolio today

Index values

:-| About Square Currency Today Change 31 Dec 15 YTD
USD-denominated Index USD 1.748 -1.50% 1.939 -9.90%
Valuation Rate USD/AUD 0.73977 -1.59% 0.73374 +0.82%
AUD-denominated Index AUD 2.362 +0.09% 2.643 -10.64%

Stock price movements

The shape of the portfolio today
^ The shape of the portfolio today (Chart: Yahoo Finance)

Portfolio stock prices

Stock Ticker Today Change 31 Dec 15 YTD
Alphabet A GOOGL $681.14 -0.59% $778.01 -12.46%
Alphabet C GOOG $668.26 -1.03% $758.88 -11.95%
Apple AAPL $92.04 -1.46% $105.26 -12.56%
Amazon AMZN $691.36 -1.09% $675.89 +2.28%
Ebay EBAY $22.725 -1.75% $27.480 -17.31%
Facebook FB $108.97 -2.77% $104.66 +4.11%
Linkedin LNKD $189.44 -0.35% $225.08 -15.84%
PayPal PYPL $34.20 -2.51% $36.20 -5.53%
Twitter TWTR $15.84 -3.65% $23.14 -31.55%
Visa V $73.34 -2.28% $77.55 -5.43%
VMware VMW $55.34 -5.47% $56.57 -2.18%

52-week performance

USD and AUD denominated indices over the past 52 weeks (Chart: Bunting)

^ USD and AUD denominated indices over the past 52 weeks (Chart: Bunting)

FX: USD/AUD

USD

DXY movements
^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for month view) (Chart: xe.com)

AUD

AUD movements against the USD
^ AUD movements against the USD today (Chart: xe.com)

AUD movements against the USD
^ AUD movements against the USD over the past year (Chart: xe.com)

Oil and Gas Futures

Futures prices

Oil extended declines below $47 a barrel as the market remained volatile. West Texas Intermediate crude futures fell 2.8% to $46.33 in New York, extending Friday’s 4.9% slump, the biggest decline in 4 months.

The collapse in the GBP since U.K. voters chose to quit the EU means more expensive imports of oil, natural gas and industrial metals.Bloomberg

Prices are as at 15:49 EDT

  • NYMEX West Texas Intermediate (WTI): $46.71/barrel -1.95% Chart
  • ICE (London) Brent North Sea Crude: $47.57/barrel -1.74% Chart
  • NYMEX Natural gas futures: $2.73/MMBTU +2.67% Chart

flag_usa USA: Services PMI (flash estimate). Jun 2016

Press Release Extract

Key points:

  • Marginal increase in service sector activity
  • Jobs growth eases for the third month running
  • Business optimism drops to a fresh survey-record low

us_psi_20160627

June data highlighted another subdued month for the U.S. service sector, with activity growth remaining marginal and job creation easing to its least marked for a year-and-a-half. Incoming new work increased at the fastest pace since January, but the rate of expansion remained weaker than its post-crisis trend. Meanwhile, service providers indicated another drop in confidence regarding the year-ahead business outlook, with the latest reading the weakest since the survey began in late- 2009.

At 51.3 in June, the seasonally adjusted Markit Flash U.S. Services PMI™ Business Activity Index was unchanged since May and only marginally above the neutral 50.0 threshold. As a result, the average reading for the second quarter of 2016 (51.8) was only slightly stronger than seen during the first three months of the year (51.4).

Reports from survey respondents suggested that relatively subdued demand continued to weigh on activity growth in June, reflecting heightened economic uncertainty and risk aversion among clients. Latest data signalled only a moderate increase in new business volumes, although the pace of expansion picked up slightly since May and was the strongest for five months.

Staffing levels increased across the service economy in June. However, the rate of job creation eased for the third month running and was the slowest since December 2014. Softer employment growth in part reflected a lack of pressure on operating capacity at service sector firms, as highlighted by a sustained reduction in unfinished work during June.

Meanwhile, input cost inflation remained subdued and slowed to its weakest since March. This in turn acted as a brake on output charge inflation across the service sector, which remained marginal and eased since the previous month.
Looking ahead, service sector companies indicated subdued confidence regarding the one-year ahead outlook for business activity. The degree of positive sentiment moderated for the second month running and was the lowest since the survey began over six-and-a-half years ago.

Markit Flash U.S. Composite PMI™

Adjusted for seasonal influences, the Markit Flash U.S. Composite PMI Output Index registered 51.2 in June, up only fractionally from 50.9 in May.

us_pmi_composite_20160627

The latest reading signalled a marginal expansion of U.S. private sector output. Both the service economy (‘flash’ index at 51.3 in June) and the manufacturing sector (‘flash’ output index at 50.9 in June) recorded subdued rates of expansion.

Markit Economics, “USA: Services PMI (flash estimate). Jun 2016“, 27 Jun 2016 (13:45) More

flag_uk Brexit Update

What if Britain threw a Parliament and no-one came?

What if Britain threw a Parliament and no-one came?

Adding to the uncertainty flowing from the Brexit referendum, Britain’s House of Commons is in disarray.

Prime Minister David Cameron has announced that he will stand down, but there is no nominated successor. Potential candidates for the Prime Ministership include two former London Mayors: Home Secretary Theresa May and Boris Johnson.

Opposition Leader Jeremy Corbyn is supported by only 8 members of his shadow cabinet, including himself. 12 members have been sacked or have resigned, and the remaining 11 members do not back Corbyn. Guardian Deputy Opposition Leader Tom Watson has told Corbyn that he has lost his authority in the parliamentary Labour party and that if there was a leadership election then members would be voting with that knowledge. Guardian Outside of Cabinet, other front benchers have resigned, including Shadow Minister covering the Cabinet Office, Scotland and Justice.

corbyn_tweet_20160627 After Corbyn refused to step down the Parliamentary Labour Party moved a no-confidence motion against him.

The Labour Party now faces an internal constitutional crisis, unable to remove a leader his MPs will not serve. The Parliamentary Labour Party is now considering electing its own leader in a move which would essentially create a separate party. This nuclear option is being referred to by MPs as a ‘universal declaration of independence.’Politico

S&P and Fitch Cut UK Credit Rating to AA

Standard & Poor’s and FitchRatings on Monday downgraded the United Kingdom’s credit rating to AA. (This was announced after the UK Stock Market had closed today).

S&P downgraded the nation by two notches, from “AAA” to “AA,” citing last week’s referendum that approved a British exit from the European Union. Fitch, meanwhile, moved its rating from “AA+” to “AA.”

“In our opinion, this outcome is a seminal event, and will lead to a less predictable, stable, and effective policy framework in the U.K. We have reassessed our view of the U.K.’s institutional assessment and now no longer consider it a strength in our assessment of the rating,” the ratings agency said in a news release.

Fitch, meanwhile, said that “uncertainty following the referendum outcome will induce an abrupt slowdown in short-term GDP growth, as businesses defer investment and consider changes to the legal and regulatory environment.” The agency said it had revised down its forecast for the U.K.’s 2016 real GDP growth to 1.6 percent from 1.9 percent.

Fitch’s 2017 and 2018 GDP forecasts were also both revised to 0.9 percent growth from 2 percent.

S&P expressed concern that wide-margin votes to remain within the EU from Scotland and Northern Ireland create “wider constitutional issues for the country as a whole.” The ratings agency said its downgrade notes the risk of a “marked deterioration of external financing conditions in light of the U.K.’s extremely elevated level of gross external financing requirements.”

Fitch also cited the possibility of Scottish independence, noting that such a vote “would be negative for the U.K.’s rating, as it would lead to a rise in the ratio of government debt/GDP, increase the size of the U.K.’s external balance sheet and potentially generate uncertainty in the banking system, for example in the event of uncertainty over Scotland’s currency arrangement.”

S&P and Fitch also both warned that future events could result in further downgrades.
“The negative outlook reflects the risk to economic prospects, fiscal and external performance, and the role of sterling as a reserve currency, as well as risks to the constitutional and economic integrity of the U.K. if there is another referendum on Scottish independence,” S&P said.
CNBC

Standard & Poor’s

Press Release

OVERVIEW

  • In the nationwide referendum on the U.K.’s membership of the European Union (EU), the majority of the electorate voted to leave the EU. In our opinion, this outcome is a seminal event, and will lead to a less predictable, stable, and effective policy framework in the U.K. We have reassessed our view of the U.K.’s institutional assessment and now no longer consider it a strength in our assessment of the rating.
  • The downgrade also reflects the risks of a marked deterioration of external financing conditions in light of the U.K.’s extremely elevated level of gross external financing requirements.
  • The vote for “remain” in Scotland and Northern Ireland also creates wider constitutional issues for the country as a whole.
  • Consequently, we are lowering our long-term sovereign credit ratings on the U.K. by two notches to ‘AA’ from ‘AAA’.
  • The negative outlook reflects the risk to economic prospects, fiscal and external performance, and the role of sterling as a reserve currency, as well as risks to the constitutional and economic integrity of the U.K. if there is another referendum on Scottish independence.

RATING ACTION

On June 27, 2016, S&P Global Ratings lowered its unsolicited long-term foreign and local currency sovereign credit ratings on the United Kingdom to ‘AA’ from ‘AAA’. The outlook on the long-term rating is negative. We affirmed the unsolicited short-term foreign and local currency sovereign credit ratings on the U.K. at ‘A-1+’.

We also lowered to ‘AA’ from ‘AAA’ our long-term issuer credit rating on the Bank of England (BoE) and the ratings on the debt programs of Network Rail Infrastructure Finance PLC. We affirmed the short-term ratings on the BoE and Network Rail Infrastructure Finance debt programs at ‘A-1+’. The outlook on the long-term rating on the BoE is negative.

As a “sovereign rating” (as defined in EU CRA Regulation 1060/2009 “EU CRA Regulation”), the ratings on the United Kingdom, are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, includingpublication in accordance with a pre-established calendar (see “Calendar Of 2016 EMEA Sovereign, Regional, And Local GovernmentRating Publication Dates,” published Dec. 22, 2015, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasonsfor the deviation. In this case, the reason for the deviation is the U.K.’s referendum vote to leave the EU. The next scheduled rating publication on United Kingdom will be on Oct. 28, 2016.

RATIONALE

The downgrade reflects our view that the “leave” result in the U.K.’s referendum on the country’s EU membership (“Brexit”) will weaken the predictability, stability, and effectiveness of policymaking in the U.K. and affect its economy, GDP growth, and fiscal and external balances. We have revised our view of the U.K.’s institutional assessment and we no longer consider it to be a strength in our assessment of the U.K.’s key rating factors. The downgrade also reflects what we consider enhanced risks of a marked deterioration of external financing conditions in light of the U.K.’s extremely elevated level of gross external financing requirements (as a share of current account receipts and usable reserves). The Brexit result could lead to a deterioration of the U.K.’s economic performance, including its large financial services sector, which is a major contributor to employment and public receipts. The result could also trigger a constitutional crisis if it leads to a second referendum on Scottish independence from the U.K.

We believe that the lack of clarity on these key issues will hurt confidence, investment, GDP growth, and public finances in the U.K., and put at risk important external financing sources vital to the financing of the U.K.’s large current account deficits (in absolute terms, the second-largest globally behind the U.S.). This includes the wholesale financing of the U.K.’s commercial banks, about half of which is denominated in foreign currency.

Brexit could also, over time, diminish sterling’s role as a global reserve currency. Uncertainty surrounding possibly long-lasting negotiations around what form the U.K.’s new relationship with the EU will look like will also pose risks, possibly leading to delays on capital expenditure in an economy that already stands out for its low investment/GDP ratio.

Detailed negotiations are set to begin, with a great deal of uncertainty around what shape the U.K.’s exit will take and when Article 50 of the Lisbon Treaty will be triggered. While two years may suffice to negotiate a departure from the EU, it could in our view take much longer to negotiate a successor treaty that will have to be approved by all 27 national parliaments and the European parliament and could face referendums in one or more member states. While some believe the U.K. government can arrive at a beneficial arrangement with the EU, others take the view that the remaining EU members will have no incentive to accommodate the U.K. so as to deter other potential departures and contain the rise of their own national eurosceptic movements.

In particular, it is not clear if the EU–the destination of 44% of the U.K.’s exports–will permit the U.K. access to the EU’s common market on existing (tariff-free) terms, or impose tariffs on U.K. products. Future arrangements regarding the export of services, including by the U.K.’s important financial services industry, are even more uncertain, in our view. Given that high immigration was a major motivating issue for Brexit voters, it is also uncertain whether the U.K. would agree to a trade deal that requires the country to accept the free movement of labor from the EU. The negotiation process is therefore fraught with potential challenges and vetoes, making the outcome unpredictable.

We take the view that the deep divisions both within the ruling Conservative Party and society as a whole over the European question may not heal quickly and may hamper government stability and complicate policymaking on economic and other matters. In addition, we believe that Brexit makes it likely that the Scottish National Party will demand another referendum on Scottish independence as the Scottish population was overwhelmingly in favor of remaining within the EU. This would have consequences for the constitutional and economic integrity of the U.K. There may be also be similar constitutional issues around Northern Ireland.

These multiple and significant challenges will likely be very demanding and we expect them to take precedence over macroeconomic goals, such as maintaining growth, consolidating public finances, and the importance of finding a solution to worsening supply bottlenecks in the U.K. economy. Lack of clarity while negotiations ensue will also significantly deter private investment.

The U.K. benefits from its flexible open economy and, in our view, prospered as an EU member. We believe that the U.K. economy was able to attract higher inflows of low-cost capital and skilled labor than it would have without the preferential access that EU membership delivers. We consider that significant net immigration into the U.K. over the past decade helped its economic performance. EU membership also helped enhance London’s position as a global financial center.

We believe that the U.K.’s EU membership, alongside London’s importance as a global financial center, bolstered sterling as a reserve currency. When we assess the U.K.’s external picture, we incorporate our view that the U.K. benefits from its reserve currency status. This leads us to make a supportive external assessment, despite the U.K.’s very large external position in terms of external liabilities and external debt, on both a net and gross basis. Under our methodology, were sterling’s share of allocated global central bank foreign currency reserve holdings to decline below 3%, we would no longer classify it as a reserve currency, and this would negatively affect our external assessment. Sterling’s share was 4.9% in the fourth quarter of 2015, according to International Monetary Fund data.

Furthermore, since having joined the European Community 43 years ago, the U.K. has attracted substantial foreign direct investment (FDI), which has helped to solidify its role as a global financial center. High FDI inflows increased the capital stock in an economy that is notable for its low investment levels; FDI was an estimated 18% of GDP in 2015. This underscores the high importance of FDI inflows for the growth prospects of the U.K. economy.

About two-thirds of all FDI into the U.K. represents investment in the financial services sector. Most investment into the financial services sector is channeled into London. The U.K. financial system, measured by total assets, stands at about 4.5x GDP and foreign banks make up about half of U.K. banking assets on a residency basis. Foreign branches account for about 30% of total U.K. resident banking assets. Brexit could lead financial firms, especially foreign ones, to favor other destinations when making investment decisions.

Net FDI is also a major source of financing for the U.K.’s current account deficit, which has persisted without interruption since 1984. The current account deficit exceeded 5% of GDP in both 2014 and 2015. We believe the “leave” vote will put pressure on sterling and could improve net exports, in particular by weakening imports as growth decelerates, leading to a faster narrowing of the current account than if the U.K. had stayed in the EU. For this reason, we forecast the current account deficit to average 3.4% in 2016-2019 compared to our April forecast of 4.5%, though we would add that past episodes of sterling weakness largely did not necessarily improve the U.K.’s merchandise deficit, which last year was 6.7% of GDP. The U.K.’s services sector ran a net surplus of almost 5% of GDP last year, but to the extent that financial services may face more difficult access to EU markets (subject to the outcome of negotiations with the EU), that position may also worsen.

Nevertheless, we see the U.K.’s high external deficits as a vulnerability, and we view an EU departure as a risk to financing sources. The U.K.’s gross external financing needs (as a share of current account receipts and usable official foreign exchange reserves) is the highest among all 131 sovereigns rated by S&P Global Ratings. At over 800%, this ratio stands at over twice the level of the G7 runners-up (U.S. and France are under 320%).

The U.K. economy had been recovering robustly since 2007. Over the past two years, it has grown faster than any economy in the G7, and faster than almost all the large European economies, including Germany. However, given the uncertainty and fall in investment tied to the “leave” vote, we are forecasting a significant slowdown in 2016-2019, with GDP growth averaging 1.1% per year (compared to our April forecast of 2.1% per year). A fall in investment will affect growth, job creation, private sector wage growth, and consumer spending.

At 84% of GDP (2016 estimate), the U.K.’s net general government debt ratio remains high. Since the 2008 financial shock, fiscal consolidation has been substantial–primarily in the form of cuts to general government expenditure. Fiscal consolidation will become harder to achieve given the slower growth, as well as in the face of rising risks of discretionary fiscal easing to arrest the economic slowdown. In our opinion, the decision to leave the EU raises further the fiscal challenges of meeting already ambitious targets, as weaker consumption and investment, possibly via a correction in the U.K.’s highly valued housing market, would take a toll on tax receipts. Over the medium term, a reduction in employment and earnings in the financial services sector could further undermine public finances. Since Brexit, plans to start the sale of shares in government-owned banks may have to be postponed owing to economic uncertainty.

We view the U.K.’s monetary and exchange rate flexibility as a key credit strength. During the financial crisis, it enabled wages and prices to adjust rapidly, relative to trading partners, we expect it to provide as rapid an adjustment again. Exchange rate adjustments can help to broadly maintain competitiveness. The U.K. authorities have drawn on the flexibility afforded by its reserve currency, and this has benefited GDP growth and public debt sustainability, in our view. As mentioned earlier, if the U.K. were to lose its reserve currency status, we would view this as a significant negative.

Despite the uncertainty around Brexit, we believe that the U.K. will continue to benefit from its large, diversified, and open economy, which exhibits high labor- and product-market flexibility, and enjoys credible monetary policy. Additionally, the U.K. benefits from deep capital markets and a globally competitive financial sector.

OUTLOOK

The negative outlook reflects the multiple risks emanating from the decision to leave the EU, exacerbated by what we consider to be reduced capacity to respond to those risks given what we view as the U.K.’s weaker institutional capacity for effective, predictable, and stable policymaking.

We could lower the rating should we conclude that sterling will lose its status as a leading world reserve currency; that public finances will deteriorate; or that GDP per capita will weaken markedly beyond our current expectations (see “GDP Per Capita Thresholds For Sovereign Rating Criteria,” published on Dec. 21, 2015). In addition, we could lower the rating if another referendum on Scottish independence takes place, or other significant constitutional issues arise and create further institutional, financial, and economic uncertainty.

Standard & Poor’s “Ratings On The United Kingdom Lowered To ‘AA’ On Brexit Vote; Outlook Remains Negative On Continued Uncertainty“, 27 Jun 2016 Zero Hedge

FitchRatings

Press Release

Fitch Ratings has downgraded the United Kingdom’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) to ‘AA’ from ‘AA+’. The Outlooks are Negative. The issue ratings on the UK’s senior unsecured Foreign and Local Currency bonds have also been downgraded to ‘AA’ from ‘AA+’. The Country Ceiling has been affirmed at ‘AAA’ and the Short-Term Foreign Currency IDR at ‘F1+’.

Under EU credit rating agency (CRA) regulation, the publication of sovereign reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review date for Fitch’s sovereign rating on the UK is 9 December 2016, but Fitch believes that developments in the country warrant such a deviation from the calendar and our rationale for this is laid out below.

KEY RATING DRIVERS
The downgrade of the UK’s IDRs and Negative Outlook reflects the following key rating drivers and their relative weights:

HIGH
The UK vote to leave the European Union in the referendum on 23 June will have a negative impact on the UK economy, public finances and political continuity.

Fitch believes that uncertainty following the referendum outcome will induce an abrupt slowdown in short-term GDP growth, as businesses defer investment and consider changes to the legal and regulatory environment. While recognising the uncertainty of the extent of the negative shock, Fitch has revised down its forecast for real GDP growth to 1.6% in 2016 (from 1.9%), 0.9% in 2017 and 0.9% in 2018 (both from 2.0% respectively), leaving the level of real GDP a cumulative 2.3% lower in 2018 than in its prior ‘Remain’ base case.

Medium-term growth will also likely be weaker due to less favourable terms for exports to the EU, lower immigration and a reduction in foreign direct investment. An adjustment in the value of sterling and changes in the business environment could also affect growth.

The extent of the medium-term economic shock will mainly depend on the nature of any future trade agreement with the EU, by far the UK’s largest export market. Statements by UK and EU leaders will provide some guidance on the UK government’s policy objectives, the likelihood of achieving them and the timeframe for negotiation. However, Prime Minister David Cameron has indicated that negotiations with the EU will not begin in earnest until 4Q16, and the final position may well not be known for several years.

Weaker economic growth will adversely affect tax revenue and the budget deficit and require the government to implement additional fiscal consolidation measures to prevent it missing its fiscal targets. We expect the general government deficit to average 3.6% of GDP over the next three years, compared with 2.8% in our prior ‘Remain’ base case. This implies that the general government debt ratio will continue rising over the forecast horizon, reaching 91% of GDP in 2017, compared with the debt ratio stabilising previously. Public sector indebtedness remains among the highest of ‘AA’ and ‘AAA’ range sovereigns. At the same time, the long average maturity of public debt almost exclusively GBP-denominated and low interest service burden imply a higher level of debt tolerance than many high-rated peers.

The outcome of the referendum has precipitated political upheaval, including the announced resignation of the Prime Minister, contributing to heightened uncertainty over government economic policies and diminished scope for policy implementation at the current conjuncture.

Furthermore, the fact that a majority of voters in Scotland opted for ‘Remain’ makes a second referendum on Scottish independence more probable in the short to medium term. The Scottish First Minister Nicola Sturgeon has indicated that a second referendum on Scottish independence is “highly likely”. A vote for independence would be negative for the UK’s rating, as it would lead to a rise in the ratio of government debt/GDP, increase the size of the UK’s external balance sheet and potentially generate uncertainty in the banking system, for example in the event of uncertainty over Scotland’s currency arrangement.

The UK’s ‘AA’ IDRs also reflect the following key rating drivers:

The UK’s ratings benefit from a high-income, diversified and flexible economy. A credible macroeconomic policy framework and sterling’s international reserve currency status further support the ratings.

The current account remained high in 2015, at 5.2% of GDP, almost unchanged from the previous year. In addition to a structurally negative trade balance, the income balance has turned negative, recording deficits of almost 2% of GDP in the past two years. There is the risk that the financing of the current account may become more expensive. At the same time, we are confident of the ability of UK banks to fund themselves in foreign currency.

Banks are liquid and were well prepared to withstand market volatility that could limit their access to funding for a period of time. Central bank funding provides them with a further line of defence in case of more protracted market closure. Banks have an aggregate Tier 1 capital ratio of 13.8%, higher than the Bank of England’s view on steady state capital requirements of around 11%.

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns the UK a score equivalent to a rating of ‘AA’ on the Long-Term FC IDR scale. Fitch’s sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.

Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

RATING SENSITIVITIES
Future developments that could result, individually or collectively, in a downgrade are:

  • Evidence that Brexit is having a more harmful impact on the UK economy
  • Worsening public finance developments leading to a continued rise in the government debt to GDP ratio
  • A more extended period of political uncertainty that undermines the economic policy framework, impedes a clear determination of the UK’s future relationship with the EU, or leads to a break-up of the UK.

Future developments that could individually, or collectively, result in the Outlook being revised to Stable include:

  • Evidence that the UK’s short and medium-term growth prospects prove resilient to the shock of Brexit
  • Further reductions in the budget deficit, leading to a stabilisation in the government debt to GDP ratio.

KEY ASSUMPTIONS
We assume that the present heightened volatility in financial markets will abate in due course.

FitchRatings, “Fitch Downgrades the United Kingdom to ‘AA’; Outlook Negative“, 27 Jun 2016 16:01 EST Fitch

Updated list of AAA-rated Countries

Country S&P Outlook Fitch Outlook Moody’s Outlook
Australia AAA Stable AAA Stable Aaa Stable
Canada AAA Stable AAA Stable Aaa Stable
Denmark AAA Stable AAA Stable Aaa Stable
Finland AA+ Stable AA+ Stable Aaa Stable
Germany AAA Stable AAA Stable Aaa Stable
Hong Kong AAA Negative AA+ Stable Aa1 Negative
Luxembourg AAA Stable AAA Stable Aaa Stable
Netherlands AAA Stable AAA Stable Aaa Stable
New Zealand AA Stable AA Stable Aaa Stable
Norway AAA Stable AAA Stable Aaa Stable
Singapore AAA Stable AAA Stable Aaa Stable
Sweden AAA Stable AAA Stable Aaa Stable
Switzerland AAA Stable AAA Stable Aaa Stable
USA AA+ Stable AAA Stable Aaa Stable

Note: Liechtenstein and Isle of Man are rated by some agencies, but are excluded from this list.

Currency: USD/GBP

The GBP was the worst performing among major currencies, falling to $1.3208 after Friday’s 8.1% plunge. The EUR weakened 0.9% versus the USD, after sliding 2.4% in the last session.

‘People are finding it difficult to comprehend what Brexit implies for the future – we don’t know yet what the magnitude of the shock will be,’ said Steven Barrow, head of Group-of-10 strategy at Standard Bank Group Ltd. in London. ‘So far, in terms of GBP-USD, we’ve seen half the decline we’re likely to see this year.’Bloomberg

GBP movements
^ GBP movements against the USD over the past month (mouseover for GBP vs EUR) (Charts: xe.com)

Stockmarket: FTSE 100

The effect of calming words from UK chancellor George Osborne early on Monday morning did not last very long, with investors bailing out of shares once again in the wake of the shock vote for the UK to leave the European Union, and the subsequent political chaos at the top of the country’s two main parties.

The FTSE 100 has now lost nearly £100bn in the 2 trading days since the result of the vote, falling another 2.55% on Monday, while the more domestically focused FTSE 250 slumped nearly 7% during the day and hit its lowest level since 2014. The FTSE 250 is down 14% in 2 trading days.Guardian UK

ftse100 movements
^ FTSE100 Index over the past week (Chart: Yahoo Finance)

flag_japan Japan update

Currency: USD/JPY

The JPY strengthened 0.1% to 102.1 per USD. It jumped in the last session and reached 99.02, the strongest since 2013. Finance Minister Taro Aso told reporters Monday that Prime Minister Shinzo Abe has asked for various measures to stabilize Japanese markets.Bloomberg

JPY movements
^ JPY movements against the USD over the past month (mouseover for inverse) (Charts: xe.com)

Stockmarket: Nikkei 225

N225 movements
^ Nikkei N225 movements over the past week (Chart: Yahoo Finance)

flag_china China update

Currency: USD/CNY

CNY movements
^ CNY movements against the USD over the past month (mouseover for inverse) (Charts: xe.com)

Stockmarket: CSI300

CSI300 movements
^ Shanghai CSI300 movements over the past week (Chart: Yahoo Finance)