Brexit Blues

24/06/2016 at 4:06 pm

Ignoring everything but the markets, here is what yesterday’s vote to leave the European Union has meant for the world so far.

UK currency and assets

The pound has fallen by 7% against the dollar, over 10% against the yen, nearly 5% against the euro and by 4-6% against the Swiss franc and the dollar zone and Scandinavian currencies.

The FTSE 100 index has fallen by a little over 2% while gilt yields have fallen sharply back to the lows reached in the middle of the month.

Haven assets

In fact government bond markets are having a generally good time of it today with big rallies in Treasuries and bunds too. Lucky investors can lock in to a negative yield to redemption over ten years of -0.06% today in Germany, a new record low.

Gold has punched higher again and if it holds at its current margin above $1,300 will post its strongest close since the summer of 2014.

Risk assets

Correspondingly these have sold off. Other European bourses have fared rather worse than London with the Stoxx 50 down by more than 7%. Tokyo was off by almost 8% overnight while the North American exchanges are taking things more coolly, having lost about 2%. Conversely, emerging market indices in Europe and the Far East have outperformed in the down swing thus far. EM currencies are weathering things well too with the worst performer being the rand this afternoon (weaker by about 3.5%).

Credit spreads as measured by the iTraxx indices are markedly wider. Both the investment grade and high yield (“crossover”) CDS indices are back to levels reached in early March before the year’s opening panic had fully ebbed away. Peripheral eurozone bond yields have gapped wider to Germany too, with the Greek ten year hit especially hard and heading for a yield of 8.5%.

Other points of interest

Oil is off by about 4% – tracking the risk off environment but actually not an especially volatile result for the commodity (and at $48 or so per barrel it is still miles away from the $28-30 lows witnessed back in January). It is also of passing interest that palladium has fallen today and that both platinum and silver have rallied far less strongly than their glittery yellow big brother.

Verdict on the Brexit Blues so far

There have been several moves consistent with a broad-based risk off, flight to quality mood, of which some have been more dramatic than others. On the currency and other fronts however the drama has not been as gripping as some were predicting, with sterling falls of over 20% and so on. This could represent nothing more than a staged decline – as more troubling news emerges into next week, for instance. Or it could indicate that much of the outcome was already priced in, or that markets are simply not so concerned about it as some thought that they might be.

Finally, there have been some gruesome economic projections in circulation today with more than one house expecting a recession. To reiterate: NOBODY KNOWS what the economic impact of Britain’s vote will be. At present it looks as though negotiations on EU withdrawal and (presumably) global trade agreements etc. are to begin in the autumn. It is the handling of those which arguably presents the greatest known risk to the country’s economic future.

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