Market Currents- 07/18/2016
- Britain Bids Adieu. In a momentous decision for both sides, Britain voted to leave the European Union in the much-anticipated referendum held on June 23rd. Even though polls leading up to the vote suggested the race would be tight, the results were still unexpected. In knee-jerk fashion, a record $3 trillion was wiped out from global markets in a mere two days.
- A Resilient Market. Just as swiftly, investors sifted through the Brexit wreckage for bargains, setting the stage for an impressive rebound following the worst two-day rout in history. The prospect of further monetary easing by the Bank of England – and possibly the European Central Bank – lent a safety net for stocks. The relief has once again propelled the markets to trade at all-time highs.
- What’s Next from Here? There is no precedent for a separation from the modern-day EU. The separation process will take years. Economic activity will be disrupted, at least in the near-term, and Britain has a difficult political road to navigate. One of the thorniest tasks will be to hammer out a trade deal between the UK and the EU’s remaining 27 members, similar to what Switzerland and Norway (both of which are not in the EU) have established.
- Fed Rate Hike on Hold. The Brexit vote has all but extinguished all expectations of the Federal Reserve policymakers to implement an interest rate hike this summer, and possibly even longer.
- Depressed Sovereign Yields. Reflecting concerns over sluggish global growth and U.K’s referendum vote, investors flocked to safe-haven assets by seeking cover in sovereign debt. The yield on the benchmark U.S. government note closed at the lowest level since 2012, while the Germany’s 10-year debt fell below zero for the first time on record.
- An Earnings Recession? At time of writing, the estimated earnings for Q2 is for a decline of -5.6%, which will mark the first time the index has registered five consecutive quarters of year-over-year declines in earnings since 2009. Special attention will be paid towards management’s commentary on the expected impact from the Brexit vote.
- Treading Cautiously. The strong market rebound since the Brexit vote is a much appreciated relief, but we fear it may be premature to put the European drama behind us. The plunge in sovereign yields and the rally in gold suggests a deeper underlying layer of skepticism. The story is very fluid, and we will continue to closely observe the situation as it develops.