Sterling weakens but the bookmakers stay firm

Equity markets started the week on a positive note, appearing to keep the momentum from most of last week. The big story for the UK was the battle lines being drawn over the upcoming referendum. Boris may have caused a few headlines, put Mr Cameron’s nose out of joint, and hit sterling, but as yet he has not changed the bookies view of the outcome. The bookmakers still make it odds on we stay in.

 The move in the pound, as it lost 2% against the US dollar and just under 1% against the euro, helped the FTSE 100 to a strong bounce. Many FTSE 100 leading companies are global exporters and therefore a weakening pound should help sales and boost profits. Combine this with the recent bounce in oil and commodities in general, has all contributed to the recovery in the index.

The Vix index closed just below 20 on Monday night, this could either be another sign of complacency or that the recent rally has further to go. This is the first time this year the Vix has broken below 20, aside from the first week in January. Twenty appears to be a significant level for the Vix index. Over the past few years the Vix moving above 20 has been a signal to buy, recently its failure to fall below 20 has indicated the period of financial stress is still apparent. What was noteworthy in the recent weeks, as the S&P tested lows of last August, and fears of a US recession increased the Vix only broke marginally above 30, staying below the 40 level seen last August at of the height of the market sell off.

Just as a reminder the Vix, in simple terms, is a measure of what a portfolio manager pays to insure his portfolio against further losses, using the derivatives market. The higher the level of the index, the more he is prepared to pay and by inference the greater the fear.

What has been encouraging is the recovery in not only the commodities but other beaten up stocks. Alcoa has recovered 20%, Citi and Bank of America 15% in recent weeks. High yield bonds have recovered, and several large institutions have returned to the debt market for funds. IBM raised 1.5bn euros via a bond maturing in 2020, with a coupon of 1.875%. IBM currently has a dividend yield of over 3.5%, covered over 2x, according to Stockopedia. This should help underpin the equity case. Time will tell whether sentiment has moved too far the other way, in such a short period of time. 

Posted on February 23, 2016 .