Undoubtedly, all fuss on financial markets is now about the Brexit. Investors try to calculate possible negative after-effects of the disintegration process, political shifts and the cost of independence for UK.
On currency markets, the victims of speculative pressure remain sterling and euro. There are two camps of analysts which has opposing views on future of the pound. First say that the drop seen after the Brexit and last week is largely speculative and expect the currency to quickly erase declines, while second views that dominate market sentiments is that pound has a vast space for bearish play as the costs of freedom lays on the shoulders of financial sector of UK which risks to see a slash of thousands of employees. Its well known that the assets managed by UK banks such as Barclays and Citi are located in EU financial institutions and changes in access will be made to that capital as the UK split from the bloc. Moreover there was speculations UK may lost the right to execute clearing of financial operations in Euro, what will certainly depreciate the influence of the country on financial arena.
The uncertainty with Brexit consequences is mainly related to the terms on which UK will continue to cooperate with EU in four main directions – goods, services, labor and capital. UK formally remains the member of EU until it initiates the legal process of separation by Article 50 of Lisbon Treaty. In next two years UK will need to find a balance between sacrifices and benefits it receives from the independence – trading tariffs, new banking, immigration and labor regulations. From last Brussels summit it became clear UK will not receive any privileges or special status as non-EU member and will have to keep its borders open to keep tariff-free trading with EU. Obviously it’s not acceptable offer for UK, where the purpose of referendum was exactly regaining control over its border to prevent excessive immigration and cheap labor flow. This hiccup implies long and intricate process of searching for trade-offs between two states what presents an incomplete puzzle for investors taking long time to solve.
According to Bloomberg survey majority of analysts expect pound to fall to 1.25 against US dollar to the end of this year, with some of them predicting more weakness for currency dropping to 1.20 and even lower. Throughout this week pound struggled to make up for the tremendous declines, but failed to hold on 1.34 level as BoE head Mark Carney pledged the bank is ready to extend stimulus program and cut rates to prop up the economy. Pound sunk to 1.32, lowest for 31 years.
Ironically, Japan pours billions of Yens in the markets to boost economy and weaken Yen to support local export, while UK effortlessly slashes 11% from pound value and fuel local stock market just quitting EU. UK 100, which dipped on Brexit managed to quickly erase declines and surge 10% on weak sterling. Spectacular growth in precious metals such as silver, palladium nickel and others propelled sharp rebound of mining shares adding 5-8% daily in post-Brexit week.
Together with yields on US, Japan and German bonds dipping to negative yield first time in the history, demand for safe heavens bodes recession will stay here for some time hamstringing global growth.
On the other part of the globe the only thing that worries investors is US monetary policy. The Brexit has probably prompted Federal Reserve to backtrack to Rate cut, with Janet Yellen figuring out how to switch from bold two rate hikes projection to the easing idea. However UK disintegration scenario was supposedly given proper weigh in Fed plan so in next Yellen speech we expect to hear hints on at least one additional rate hike this year.
USD index, surging 3% after Brexit was trading in the range of 95.50-97.00 this week. The row of economic data on consumption, inflation, spending and construction in US paints cloudy picture on further growth. Despite survey-based upbeat Consumer Confidence at 98.0 and ISM Manufacturing at 53.2 points, Personal Consumption, Personal Income, Mortgage Applications, Pending Home Sales and Construction Spending came lower than expected. Overall bias suggests US labor market was not likely to have enough strength to recover from shocking 38K May figure so June NFP which is due next Friday won’t likely to live up to optimistic outlook.