UBS CIO Warns "The Status Quo Is Over… Get Used To It"
By Tyler Durden
From the desk of Mark Haefele, CIO UBS Wealth Management,
Brexit – Navigating The Aftermath
In short
The effects of the UK's vote to leave the European Union have been felt around the world. Markets have re-priced to reflect heightened political uncertainty, the threat of lower growth in Europe, and the potential for deeper contagion to the global economy and financial system.
What's moved?
Equity markets initially traded down sharply but have recovered some ground during the day: the S&P 500 is currently -2.4%, European banks closed -13%, the Nikkei -8%, and the FTSE 250 -7%.
Meanwhile, the dash for safe havens led the Japanese yen to rally by more than 6% at one point, 10-year gilt prices are +2.7%, Treasuries +1.7%, and Bunds +1.5%. The Swiss franc did not rally materially against the euro, but only due to intervention from the Swiss National Bank to limit currency strength.
It is important to remember that although the equity market moves have been significant, they come in the context of a sharp rally in recent weeks, as markets had moved to largely price out the risk of Brexit. Betting markets had moved from pricing the risk of Brexit at around 40% last Friday to as little as 15% yesterday. While expectations clearly needed to readjust, markets are now, in general, back to levels of last week, and above the lows of last month. As such, today's moves should not be considered a major change in momentum at this stage. Even the British pound is overall down by only 2% in the past 10 days.
This kind of volatility goes to show that core investment principles like rebalancing, diversification across asset classes, and geographies are key, particularly as nations move further into unchartered political and economic territory.
What we're watching
Looking forward, global market outcomes will be shaped by the progression of central bank intervention, global risk appetite, political risk, and economic contagion.
Central banks have already moved quickly to stabilize market conditions. The Bank of England has made an additional GBP 250bn of liquidity available, and confirmed open currency swap lines if banks need them. The European Central Bank (ECB) also said it stood ready to provide additional liquidity if required. Both the Swiss National Bank and the Bank of Japan intervened to mitigate the appreciation of their currencies. The US Federal Reserve highlighted Brexit as a key risk for financial markets in its last statement. We now believe it highly unlikely that US interest rates will rise at the Fed's July meeting, and we now only expect one interest rate hike in 2016.
So far, global central banks have continued their recent form by acting with determination to maintain financial stability, while supporting growth and inflation. We expect them to remain on the alert to any indications of tightening financial conditions, and respond promptly if they arise. But signs of central bank indecision or unwillingness to act could be considered a negative signal for risk markets.
Global risk appetite: Ahead of a series of political events, including the Spanish election, Greek debt negotiations, …read more
Source: UBS CIO Warns "The Status Quo Is Over… Get Used To It"
