Markets Recover from Brexit Sell-Off

Weekly Report - 05/07/2016

Markets Recover from Brexit Sell-Off

Equity markets, which plunged for two days following the Brexit outcome recovered most of their lost ground by Friday's close. Gold prices however managed to hold onto Brexit led gains despite the risk-on rally. On Thursday, BoE Governor Mark Carney’s hinted at possible interest rate cuts and additional QE, helping the equity markets to post strong gains.

Weekly Review

The Brexit induced risk aversion faded by mid-week as risk assets started to pare losses. After touching new lows on Monday, even the British pound pulled back strongly against the US dollar from its 31-year lows, but analysts were not quite convinced if the recovery was going to last. Ratings agencies were quick to downgrade the UK's credit ratings, including S&P Global Ratings and Fitch Ratings stripping UK of its coveted AAA and AA+ investment grade status. By Thursday, S&P also cut the Eurozone's credit rating from AA+ to AA but raised its outlook as 'stable' compared to the UK's outlook which is 'negative.' The Bank of England's Governor Mark Carney gave a speech on Thursday evening where he said that the central bank will assess the impact of Brexit risks on the UK economy and will give a full assessment by the August policy meeting. He said that the central bank could look at rate cuts and potential expansion monetary policy if need be. His comments sent the sterling lower on the day, but supported the equity markets. Even gold prices edged higher on the prospects of the BoE restarting its QE program.

On the economic front, data last week saw US first quarter GDP being revised higher for the third time. The data from the US commerce department showed that the US economy now grew at a pace of 1.10%, compared the first estimates of 0.50% and the second estimates of 0.80%. Over the week, other data from the US included the personal income and personal spending, both of which showed a robust pickup in consumer spending and wages. Inflation data released over the week was tame, but did not show any immediate risks to the downside. The US dollar continued to be supported by safe haven flows and prospects of the Q2 GDP posting a recovery.


The Week Ahead

The markets next week start off on a quiet note with the US closed on account of the Independence Day holiday. However, the main focus will be Friday’s jobs report for the month of June. Analysts forecast an average of 175k – 181k jobs being added to the US economy, while the unemployment rate is expected rise back to 4.80%. The June non-farm payrolls report will be important in the context of both the US Fed rate hike prospects as well as questions on near term recession.

Data from the Eurozone includes services PMI numbers. Bank of England Governor, Mark Carney is expected to speak over the week and the central bank will be releasing its financial stability report. Following Carney’s dovish comments last week, the financial stability report will likely gain more than usual attention especially after the UK voted to leave the EU.


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