History is in the making. 23 June 2016 will be remembered for the day in which the British people voted out of the European Union. A really remarkable decision which has, at least over the past weeks, caught investors unawares.
As expected, risky assets are tumbling this morning all over Europe particularly equities and High yield bonds, the GBP lost further ground whilst save haven currencies such as the US dollar and Swiss franc is where investors are putting their money. Gold is also on the increase.
Meanwhile, peripheral European Government bonds, which fall under the risky assets category have widened on average by 10 basis points whilst the benchmark 10-year Bund German reached historical lows when the markets opened this morning.
We will not seek to justify whether it was the right decision or not, of whether to remain or exit the European Union, that’s up to the Brits to decide. What we are particularly concerned about is the short-term ramifications on global capital markets. What is of greater concern for Europe is the sense that the EU as we know it may not survive.
Undoubtedly, the UK is systemic to the global economy most notably via London, the capital of the finance world. We remain aware that this outcome could also result in other Eurosceptic movements in Europe to follow the UK’s lead. This could see the rise of far right and far left movements taking centre stage.
This morning, as opined above, we have seen one of the sharpest knee jerk reactions in recent history, as uncertainty still reigns. We expect the US Federal Reserve, European Central Bank and Bank of China all to come out with statements possibly reassuring markets that they could continue to provide liquidity and ease investor’s concerns. In fact, the Bank of England has announced this morning that it would be ready to provide an additional $250bn through its normal facilities. Following the announcement of the resignation of the UK Prime Minister, David Cameron, earlier this morning we would expect European politicians to start their much needed soul searching and come out with a new vision for the EU. Failure to do so could see Europe enter a new era of uncertainty and volatility.
At this juncture, our advice would be to tread with caution, and let markets calm down from this negative euphoria. These are not the ideal market conditions to be trading in, both on the equity as well as fixed income front. Portfolio valuations are inevitably going to be priced lower following the Brexit outcome. Furthermore, we would not exclude increased volatility and downward pressure but we would nonetheless recommend not rushing in any decision making. Naturally, opportunities will arise but we feel it is too premature to be playing the markets at this stage.
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