Saturday 21 April 2018

Daily Market Update: Brexit tremors trigger equity and sterling sell-off


Richard Ramsey

Financial markets have been hit with a fresh bout of Brexit concerns over the last 24 hours.

Risk aversion returned to markets with a marked sell-off in global equity markets and sterling.  The Euro Stoxx index of the 50 blue-chip companies within the Eurozone ended yesterday’s session 1.7% lower and is over 7% below its pre-UK referendum close on 23rd June. The key concern within European equity markets remains the health of the Italian banking system. The UK FTSE 100 closed 0.4% higher yesterday.  The FTSE 100’s outperformance is due to the fall in the value of sterling.  Over 70% of FTSE 100 revenues are raised outside of the UK and the decline in sterling mechanistically raises their share prices.  A more meaningful barometer of the UK economy is to look at the next tier of UK companies with the FTSE 250. The latter fell by 2.4% yesterday and is now over 9% below its pre-referendum level. Ireland’s ISEQ fell 2.6% yesterday and is over 13% below its 23rd June level.  Wall Street returned from its 4th July holiday with the S&P 500 closing 0.7% lower.  Overnight the sell-off has continued in Asia and red screens are once again evident in early trading within Europe. The risk aversion has been accompanied by a flight to safety with safe-haven assets such as government bonds and gold benefitting. Meanwhile the price of a barrel of Brent crude has fallen by over 3% to $48pb.

Sterling has moved sharply lower over the last 24 hours and has recorded a fresh 31-year low against the dollar.  GBP/USD opened yesterday at $1.323 and briefly dipped below $1.28 overnight.  The pound has recovered almost two cents and is currently changing hands at $1.297. This is still 2% lower than yesterday’s open. Sterling’s losses against the single currency have been less severe but no less significant. EUR/GBP has moved from 84.1p to 85.3p over the last 24 hours having briefly touched 86.2p overnight. The single currency has also lost ground against the dollar moving from $1.113 to $1.106 over the last 24 hours or so. 

The UK property market has been showing some signs of stress with three asset managers freezing withdrawals on real-estate funds following a surge of redemptions.  According to Bloomberg, industry analysts have warned that London office values could fall by as much as 20% within three years of the UK leaving the EU. This is a factor weighing on investor sentiment towards UK banking stocks  According to John Gieve, a former deputy governor of the Bank of England, “I am expecting quite a sharp reduction in investment spending, a sharp hit to the commercial property market, probably a check to consumer spending, all of which could push us towards zero or below growth”.  Yesterday the Bank of England responded to the growing risks associated with Brexit by cutting the counter-cyclical capital buffer rate for UK banks with immediate effect to 0% from 0.5% of financials' UK exposure. This will reduce regulatory capital buffers by £5.7 billion, raising banks' capacity to lend to households and businesses by up to £150 billion.

Looking to the day ahead the focus will remain on financial markets and the ongoing Brexit tremors. However, there are some key releases in the US this afternoon.  The ISM Non-manufacturing index for June is expected to show a modest pick-up in the rate of growth.  Meanwhile the FOMC minutes for the meeting held on 14-15 June will be released. This meeting pre-dates the UK referendum. Yesterday one of the FOMC policymakers, William Dudley New York Fed President, said the UK referendum outcome could escalate into a significant headwind if it triggers wider financial market turmoil, potentially clouding the horizon for US interest-rate policy. Meanwhile San Francisco Fed President John Williams said UK referendum outcome poses less risk than China turmoil and won’t derail the US economy, leaving the Fed scope to raise interest rates this year if his growth and inflation expectations are met.

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