Thursday, 4 August 2016
- Currency moves were substantial, particularly weakness in Sterling (GBP), while the United States Dollar index (USD) strengthened about 4% and the Japanese Yen also strengthened. The NZ dollar (NZD) declined 3% following the UK’s leave decision but has since steadied around 70 US cents. The NZD remains a little higher for the year to date, both against the USD and a broader trade weighted basis. Many initial currency moves were retraced over the course of the European and US sessions.
- Apart from GBP, many of the falls in markets have reflected retracements in the rally of the previous week when ‘Remain’ was the widely expected outcome, or retracements to the lows seen in January and February, 2016.
- There is a high degree of uncertainty about the future, as the sustainability of the EU is being questioned and further referendums in the EU are probable. Scotland, which voted aggressively in favour of ‘Remain’, appears to be laying the groundwork for another Scottish referendum on independence, soon. This uncertainty could serve to undermine growth. However, for Eurozone countries, the hurdle to leave the Eurozone is higher than Britain leaving the EU as this involves adopting a new currency, paying higher interest rates etc.
- There is a risk of recession in the UK. However, we will be closely watching the data and monitoring developments in our ongoing assessment of the risks to growth. UK assets appear to have priced in this uncertain future environment. It’s important to note that the UK economy represents only 2.4% of global GDP, so the economic impact of weaker UK growth on the global economy is unlikely to be significant.
- Contagion risks: financial stress on European banks (particularly Italian banks) could be the mechanism that causes the transmission of this event to go from a UK event with a global hiccup to a global recession.
- Investors should continue to gather information and assess the medium term implications.
- AMP Capital’s investment teams located in London have been providing on-the-ground insights and as developments unfold we will continue to draw on their perspectives for the benefit of our clients.
- Markets can overreact when presented with increased uncertainty, which can create dislocations and heightened volatility in the short-term. There will be investment opportunities in this environment as some markets become oversold, and we will continue to carefully consider portfolio strategy and medium term opportunities. Extract from AMP Capital, Insight 28 June 2016
Extract from AMP Capital, Insight 28 June 2016.
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