The global capital markets are stabilizing for the first time since the UK referendum. It is not uncommon for markets to move in the direction of underlying trends on Friday’s; see follow-through gains on Monday, and a reversal on Tuesday. That is what is happening today. Turnaround Tuesday after such dramatic price action over the last two sessions has the feel of the proverbial dead cat bounce.
The global economic outlook may be grim but it would be grimmer still but for Asian economic growth. There’s no dynamic growth pole anywhere else in the world and global uncertainties have increased around the rise of Donald Trump in North America and Brexit in Europe.
The UK choice to leave the EU on a 52%-48% vote is one of those moments that define before and after. It is true that there are examples of the EU not liking the outcome of a referendum and allowed a repeat, such as in the Maastricht Treaty or the European Constitution Lisbon Treaty.
Efforts for another referendum or a Scottish or Welsh veto do not seem to be the path forward. That will not fly now. Tsipras of Greece chose to ignore the results of his referendum last summer. We may not be the first to notice this, but the UK is not Greece.
The British decision to leave the EU has been a long time in the making, but it does not lessen the shock that many politicians in the UK and across the EU are feeling.
While London begins the long process of negotiating an exit from the European Union, some of our attention must now turn to the rest of the organisation and to the other member states.
The UK’s decision to leave the EU spurred a dramatic risk-off move through the capital markets. The dollar, yen, and gold soared. Equities and emerging market assets sold off hard. Core bond yields fell sharply.
Looking at the varying patterns of the capital flows into Asia in the last decade, the period after the taper tantrum on 21 May 2013 until 31 October 2015 is of particular interest from both global and local perspectives.
Globally, the wave of capital flows became more volatile due to various international factors: (i) the pace of monetary policy normalization in the United States (US), (ii) the slowdown in the People’s Republic of China, (iii) the slide in oil prices, and (iv) higher political uncertainty and elevated geopolitical tensions.
There is a nervous calm in the capital markets today. The focus is squarely on tomorrow’s UK referendum. According to a BBC focus group, the leave camp won the debate 39%-34%. The last polls show a contest that it too close to calls in that the results are within the margin of error. The Financial Times poll of polls has it at 45%-44% in favor of Brexit.
Persistently low interest rates are set to hit bank profits in America, triggering warnings from analysts across Wall Street. A number of notes released late last week and early this week to clients warned that Federal Reserve policy is likely to hinder bank profits for a long time, bringing to doubt both Wall Street’s ability to improve profitability and the future of employment in the financial sector.
The US dollar remains heavy against most of the major and emerging market currencies today as the pullback that began at the end of last week continues. The Australian and New Zealand dollars are leading the way, with 0.5%-0.6% gains. Nevertheless, we expect to see the dollar stabilize over the next couple of sessions.
A familiar theme of this column has been the significant uncertainty about the global economy that is leaving investors – and to some extent, consumers – standing on the sidelines. That in turn means lower growth, which validates the decision to stand on said sideline. Moreover, the vicious circle continues.
This week’s events provided further evidence for that view.
