Confusion & Volatility over what happens next
Last week global financial markets swung from being confident of a Remain victory to confusion, as a vote to Leave was confirmed in the early hours of Friday morning. Traders attempted to reprice securities in a market where foreign currency prices were changing rapidly, and the full fallout from the vote was uncertain. There remains significant further political risk in both the UK and Europe.
Interestingly, the FTSE 100 finished the week up 3.2% following a strong rally in prices to Thursday. Furthermore, the effect of a falling sterling on the value of FTSE 100 companies was positive, as over 70% of revenue is derived in foreign currency. However, mid and small cap companies fared less well as estimates for slower UK economic growth were built into earnings forecasts.
Gilt yields fell back to the historic lows seen two weeks ago. This was a combination of a flight to safety, pricing in a possible interest rate cut by the Bank of England and potentially slower economic growth reducing the attractiveness of other assets. It is likely that the Bank of England will cut interest rates at some point in the next six months although this will be data dependent. It may be a difficult task for the monetary policy committee to balance the need to cut interest rates to stimulate the economy and raising them to contain inflation. A reduction in the value of the pound will likely lead to higher inflation as imports become more expensive.
Markets are likely to remain volatile for the foreseeable future with investors constantly adjusting their outlooks for the UK as new information presents itself. While Brexit fears have concentrated most of global investors and policymakers attention for the last couple of months, this does not mean other risks have abated. As time passes a greater concentration may once again turn to the health of the Chinese and US economies.
|UK 10 Year Gilt Yield||1.205||1.033||-0.172||-14.3%|
US consumer confidence is announced tomorrow. Japanese inflation data is due to be released on Friday.