There is only one direction in markets at present and that’s avoiding risk at nearly all costs. The fall below zero on the 10 year German government bond yield yesterday was the latest manifestation of this, but it can be seen pretty much everywhere. Next week’s EU referendum vote in the UK is the primary reason for this and between now and then, there’s unlikely to be any escape from its grip. Investors are unwilling to take on positions that are likely to be negative effected by the UK’s potential exit from the EU. In FX markets, this can be seen in the continued rise of the yen, with the Swiss franc also gaining to 6 month highs against the single currency. Both the SNB and BoJ meet this week to discuss policy (BoJ overnight to night and SNB tomorrow), but neither are likely to react to the latest moves in markets, which could be unwound quite aggressively should the UK vote to remain in the UK. So for now, words are likely to be the more utilised tool that actions.
Talking of central banks, we have the conclusion of the June Federal Reserve meeting in the US this week. No move in rates is now seen, so it’s going to be a question of listening to the press conference and also the latest staff projections on the economy. Recall that back in December, members were looking for four rate hikes this year. After today, there will be only four meetings left, so even if we see that scaled back to two, it will represent a fairly significant pick-up in the tightening pace. At most, I see once move this year and there is a growing risk that if seen, it will have to be reversed in the coming year.