Anothermomentous week in Europe, with markets affected by a new U.K. prime minister,another terrorist attack in France, a coup attempt in Turkey and a bankingcrisis in Italy. Not for the first time this summer, European leaders appealedfor calm.
Justthree weeks after the Brexit vote in the U.K., Theresa May has taken control ofthe government. She has already called for the Treasury to spend more oninfrastructure projects to keep the economy on track in the difficult monthsahead.
Marketswelcomed the speed of the U.K.'s transfer of power. However, so soon afterspectacularly misjudging Brexit, investors got it wrong again on Thursday whenthe Bank of England's Monetary Policy Committee decided, on an 8-1 vote, not toreduce prime lending rates. Governor Mark Carney was accused of"teasing" money markets, but they are still pricing in a cut by theend of summer.
Marketsresponded to the surprise by selling core government bonds and pushing sterlingto its highest level this month against the U.S. dollar. The global rally inequity prices also continued unabated, with investors seeing the U.K.'s delayin lowering its 0.5% interest rate as indicative of a resilient local economy.There were also positive signals for the global economy, including an encouragingstart to the second-quarter earnings season.
Nevertheless,with their mood still clouded by implications of the Brexit decision, Europeaninvestors were spooked last week by a crisis in the Italian banking sector.Italian banks have been beset by a surge in nonperforming loans, and unease hasbeen fueled by the new European financial stress test for banks, the results ofwhich are due for release July 29. Talks between Rome and European Unionofficials have sought to ease the risk to private creditors.
As aresult, European equity funds suffered their largest-ever weekly withdrawals,with an outflow of US$5.8 billion by Wednesday evening (when seven-daymeasurements are taken). This eclipsed the previous record, set in October2014, when the market reacted to fears of a German economic slowdown.
Investorsfled to the relatively safety of the U.S., whose equity funds received thelargest single weekly takings since September 2015. Despite the incoming funds,U.S. equities closed the week on a subdued note.
Theflight to safety also saw Germany become the first eurozone country to sell 10-yearbonds with a negative yield. The auction saw Germany effectively chargeinvestors 0.05% to lend it money for 10 years. Switzerland and Japan last yearbecame the first countries to sell benchmark 10-year government debt atnegative yields, and increased bond prices in the market have seen many yieldssubsequently trade below zero.
Themonth-to-date has been good for mined commodity prices, with all of the majormetals higher. As mentioned in last week's Backfill, the price of nickel has started to improve atlast, breaking through US$10,000 per tonne, and zinc breached US$2,200 pertonne, which is its highest since May 2015.
Eventhermal coal is up 25% from the US$49 per tonne at the end of last year,closing at over US$62 per tonne on Friday. The market was helped by news thatChina's Jiangxi province is to close 205 coal mines with a combined capacity ofalmost 13 million tonnes per year as part of the local government's five-yearplan to close 283 coal mines with an annual capacity of 18.7 million tonnes. Thecentral government is seeking to cut China's coal-mining capacity by about 10%,or 500 million tonnes over the next five years.
Nevertheless,coal is increasingly unloved by investors. One of Sweden's largest pensionfunds, the Fourth Swedish National Pension Fund, known as AP4, last weekannounced that it will drastically cut its exposure to fossil fuels. AP4 will"decarbonize" its US$14.7 billion global equity portfolio by 2020,and will instead commit US$3.2 billion to low carbon investments.