Friday 24 November 2017

Daily Market Update: Post-referendum volatility eases, for now at least


Simon Barry

Building on the tentative signs of stabilisation we touched on in yesterday’s comment, risky asset markets recorded modest gains yesterday after two days of marked weakness following the UK referendum.

  European equity markets generally chalked up gains of 2% or more, with the FTSE among the better performers following a 2.6% rally.  Wall Street took its lead from developments on this side of the Atlantic with the S&P closing out last night’s session in positive territory to the tune of 1.8%.  Moreover, the stability has extended through the Asian session with the early European price action pointing to some further upside for global stocks in the day ahead. Volatility in sterling’s price on the currency markets has also eased.  The pound has managed to edge higher against both the dollar and the euro against which it opens at $1.3390 and 82.9p respectively following an appreciation of 0.7% and 0.5% over the past 24 hours or so. 


Following the enormous moves to the downside in the prior sessions, the emergence of a degree of two-way price action isn’t surprising as the raw shock value of the referendum result fades.  And, as we look ahead, we wouldn’t be surprised to see periods in which markets can seemingly trade with a more positive and constructive hue, potentially involving spells of upside for sterling on the exchanges.  After all, the sterling moves we have already seen are simply huge, and were never going to be sustained indefinitely at such a rapid pace: even after the gains noted above, sterling is still 11% and nearly 9% lower than where it was last Thursday evening against the dollar and euro respectively.  In this context, we continue to emphasise that the big picture here is one in which the UK has suffered a significant adverse shock.  And this shock will take considerable time to work through, resulting in heightened uncertainty for real economy agents, policy makers and investors alike over an extended period in which markets are likely to continue to display high (and likely intense at times) levels of volatility pending greater clarity on the resolution of the issues.  So while the more stable sterling price action we have seen on the currency markets over the past day or so is certainly welcome, we continue to expect that the UK currency will be subject to further bouts of selling pressure and volatility in the weeks ahead. 

Little by way of concrete developments has emerged so far from the ongoing EU leaders summit in Brussels. European Council President Mr Tusk said that the new Prime Minister of Britain will have to invoke Article 50 and while the EU leaders understand that time is needed for reflection "the message was very clear that the British government specify its intentions as soon as possible."  Interestingly, according to news reports, ECB President Mr Draghi told EU leaders that he is of the view that growth in the Euro area could decrease as much as 0.5% for the next 3 years after UK referendum outcome.  Expect more dovish public pronouncements from the ECB in the period ahead as speculation mounts that the ECB - and not just the Bank of England - will likely need to provide more monetary stimulus to mitigate the fallout from Brexit.  Closer to home, Finance Minister Michael Noonan yesterday revealed that the initial assessment of his department of the hit to Irish growth from Brexit could be around 0.5% next year i.e. that the economy was now possibly going to grow by 3.4% rather than the 3.9% previously forecast, but that this should not affect the Eur1bn estimate of available fiscal space for Budget 2017.

Domestic economic news yesterday included retail sales figures for May.  Last month was another impressive month for sales volume growth, with headline expansion of 0.6% m/m and core (ex. motor) growth of 1.2% m/m, bringing the annual rate of increase to 8.1% and 6.5% respectively. While consumer trends (and economic trends in general) will need to be watched closely for signals regarding how jitters linked to the referendum result may affect confidence and spending, these results put annual sales volumes growth for the first 5 months of the year at 7.9% in the headline measure and 5.8% for the core (ex. motor) measure, underlining the very strong momentum currently present in the Irish economy which will act as a very helpful buffer for any negative shock that passes through. 

Away from referendum related news, US consumer confidence rose by much more than expected in June, from 92.4 to 98.0 – an 8-month high. This was mainly due to improvements in the expectations components, with survey respondents more confident in the prospects for business conditions, the jobs market, and income. Ordinarily, this would represent an encouraging sign for consumption, but given that the survey predates the referendum result and the (well publicised) market turmoil that followed, we would like to see positive trends sustained beyond June before drawing too firm a conclusion on the outlook. First quarter GDP was revised up from 0.8% to 1.1% sa annualised. While personal consumption growth was revised down, this was more than offset by upward revisions to investment and net trade.


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