Weekly Market Update: June 28th 2016

Financial market participants endured another volatile week, from the Monday exuberance that saw the major European equity indices rally more than 3% as markets priced little chance of BREXIT, to the all-out panic on Friday after the surprise news broke that Britain had voted to exit the European Union. It will be a week to remember for Europe, and Britain.    

As European stock markets prepared for the open on Friday morning, there were flashbacks of 2008 with some of the major indices down more than 10%. Sterling was falling off a cliff against the US dollar and core government bond yields were making new record lows. The implications of the British exit were being extrapolated to the nth degree.

As ever, central banks stepped into restore some calm, with all of the major central banks issuing statements outlining their commitment to support the smooth functioning of markets, the provision of liquidity being the order of the day. In his statement Bank of England governor Mark Carney noted “the Bank of England stands ready to provide more than £250bn of additional funds through its normal facilities….and is also able to provide substantial liquidity in foreign currency, if required”.

As a result, there was some snapback in the moves witnessed early in the day. The UK’s FTSE 100 Index which had been down a jaw-dropping -8.67% ended the day down -3.15%. Sterling recouped some of its losses and core government bond yields bounced off their lows.

Friday’s carnage less severe in the context of the overall week…..

In Europe, the FTSE Eurofirst 300 closed down -0.83% for the week. The German DAX index fell -0.77% while the French CAC 40 was down -2.08%.

The S&P 500 index ended the week down -1.63%, while the tech-heavy NASDAQ Composite fell -1.92%. The much quoted CBOE Volatility Index (VIX), the so-called ‘fear index’, a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices, jumped +32.72%.

In Asia, the Nikkei 225 was once again this week the worst performing major index as it fell -4.15% after a drop of 8% on Friday. The continuously strengthening Yen is weighing heavily on Japanese shares and we could see the Bank of Japan intervene. The Euro and the US Dollar are down -13.09% and -15.07% against the Yen this year, respectively.

Demand for perceived ‘safe-haven’ assets…..

No surprise, Government bonds were in demand last week as investors sought safety from Friday’s sell-off. With yields moving inversely to prices the UK 10-year treasury yield fell 5bps to 1.09%. The German 10-year bond yield fell 7bps to -0.05%, after hitting a low of -0.17% on Friday.

Tremors from BREXIT are likely to be felt in financial markets for the coming months and will no doubt lead to additional demand for government debt. Despite a cut to the UK’s sovereign debt rating, yields could move lower if the Bank of England pursues more aggressive monetary policy.

Week Ahead

Equity markets have bounced this morning after a miserable Monday for the major equity market indices.

The potential fallout from Britain leaving the European Union continues to stalk the financial markets, as market participants remain stuck in a purgatory of uncertainty. European bank shares have being hit particularly hard.

The yield on the 10 year UK government bond tumbled a further 10bps on Monday to 0.954%, the first time ever it has fallen below 1%. Talk of a UK recession has fuelled speculation that the Bank of England will be forced to pursue more aggressive monetary policy.

Investors will be looking to Mario Draghi today for some soothing words as he speaks for the first time since the news of Brexit broke on Friday. ‘Super Mario’ has spent years trying to stimulate an economic recovery in Europe so BREXIT will likely be seen as another hurdle for him to overcome.