Monday 24 October 2016

Markets stage Brexit bounce, but analysts warn of further slumps

Published 29/06/2016 | 02:30

Traders work on the floor of the New York Stock Exchange (NYSE). Photo: Reuters
Traders work on the floor of the New York Stock Exchange (NYSE). Photo: Reuters

Stockmarkets across Europe rallied yesterday as investors fished for bargains, and despite ratings agency Standard & Poor's having stripped the UK of its coveted 'AAA' rating on Monday night.

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Markets surged as EU leaders met in Brussels for a crisis meeting on the UK's referendum vote to leave the Union.

Ireland's ISEQ Overall Index was buoyed by the improved sentiment, gaining 2.8pc to close at 5,446. But the index is still 14.5pc lower than it was last Thursday. Some €19bn has been wiped from its value.

Shares that have been hardest hit since the Brexit result recovered some ground, but are still way off what they were changing hands for before Friday.

Bank of Ireland was the biggest beneficiary of the improved sentiment, soaring 10.6pc. Cavan-based insulation maker Kingspan rose 7.3pc, while Ryanair gained 3.1pc.

Ryanair chief executive Michael O'Leary confirmed that the airline wouldn't add extra capacity from new aircraft deliveries in the UK next year following the Brexit vote.

In the UK, shares in Irish companies that maintain listings on the FTSE also gained.

Shares in Woodies DIY owner Grafton Group were 7.3pc higher in London at the close, having been battered in the previous two sessions. Food group Greencore closed 2.8pc higher.

But the stockmarket recovery only helped to claw back some of the huge losses that have been inflicted since Friday.

Investors are pinning at least some hopes on a co-ordinated central bank response to tackle the massive economic and political upheaval.

But some analysts are wondering if yesterday's partial recovery was merely a so-called 'Dead Cat Bounce' - financial jargon used to describe a temporary recovery of a bear market.

That's especially a concern given the enormous pressure that is being piled on the UK economy, including the ratings cuts, Sterling's decline, and promised tax hikes and spending cuts that Chancellor George Osborne said yesterday would be necessary to stabilise the economy.

David McNamara, an economist at Davy Stockbrokers in Dublin, said that while the impact of Brexit remains unclear at this stage, the firm expects to "materially cut" its economic growth forecast for the UK in 2017, to either flat or negative.

"Business investment will continue to fall in the coming quarters, and this will eventually lead to slower jobs growth and weaker consumer spending," he said. "Political developments will only add to this uncertainty; if renegotiations drag on with no visibility on access to the single market, investment and asset prices will be impacted further."

Before yesterday's boost, about $3 trillion had been wiped off the value of global stockmarkets since last Thursday's historic vote.

Yesterday, Germany's DAX rose 1.9pc, while France's CAC-40 was 2.6pc higher. Italy's FTSE MIB gained 3.3pc.

And despite Sterling rising yesterday from a 31-year low, currency analysts warned that the improvement may only reflect a pause as traders who had bet against the pound booked profits.

Tuesday's rebound was slight compared to the two-day plunge that followed the Brexit vote, with Sterling still down more than 10pc from its closing price on Thursday last week.

"Given the sizable movements we saw over the last few days, it would be pretty reasonable to expect that there could at times be periods of stability or profit-taking," said Eric Viloria, currency strategist at Wells Fargo Securities in New York.

Sterling was up 0.88pc against the dollar, at $1.3342, regaining some ground after hitting the 31-year low of $1.3122 on Monday.

The euro was up 0.26pc against the dollar at $1.1054, after hitting a three-and-a-half month low of $1.0909 on Friday. (Additional reporting from Reuters)

Irish Independent

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