Brexit fears took hold of equity markets on Friday, as the FTSE 100 fell almost 2%, the biggest drop in almost 4 months. The pound likewise fell almost 2% against the US dollar, the catalyst for the selloff was an opinion poll suggesting the leavers have 10-point lead. Despite this poll, bookmakers still have a remain vote as odds on. Bonds were definitely flavour of the week, yields fell across the board, 10-year gilt yields fell to 1.23%, however these returns seem very attractive compared to those offered by 10 year German bunds which currently stands at a few basis points. 10 year US treasury yields fell to 1.65%, the lowest since May 2013. The S&P 500 failing once again to break through previous record highs.
Aside from Brexit, once again fears of an economic slowdown were also to blame for the flight away from equities and back to bonds. The World Bank lowered its forecast for global growth to 2.4% from 2.9%, blaming sluggish growth in developed economies, weak commodity prices, weak global trade and finally diminishing capital flows. The Vix index, rose sharply on Friday another sign fear is on the increase. Lipper funds services reported another $4bn were pulled from equity markets in the past week.
The focus in the coming week will be the rate announcement from the Federal Reserve on Tuesday and Wednesday. There can be no chance the members will look to raise interest rates this week, the spotlight will be on the policy statement as well as Janet Yellen’s press conference for any hints of how the Fed see the coming months. During the week there is a broad range of data from the world’s largest economy, from retail sales to inflation to industrial production. Other months these data points could well have impacted interest rate sentiment; in the current uncertain environment it is unlikely to have much impact.
The Bank of Japan will meet this week, and in contrast to the Federal Reserve speculation surrounds as to whether the members will add further stimulus measures, to stem the strength of the Japanese yen and help support the Japanese economy.
Aside from Brexit and Ascot, it’s a reasonably busy week for economic data closer to home. On Tuesday we get the latest inflation data from May. UK inflation is expected to remain flat month on month from April to May. On Wednesday the latest unemployment rate and average earnings. Thursday will be the focus as the minutes from the last Monetary Policy Meeting are released. We also get the vote and the latest rate decision, it’s probably fair to say that mot even Mr McCafferty will be voting for a rate rise.
Sentiment is likely to remain cautious towards risks assets at least until the referendum is over. The Vix could well climb above 20.