The weekend press is naturally full of a decision that almost every one failed to predict, including the bookmakers. The referendum appears to have highlighted the divisions within the UK, young and old, affluent and less so, Ireland, Wales, Scotland and England. Fears will now follow that the more disaffected areas of Europe will look for their own versions of Brexit. The political fallout has likewise been significant, David Cameron has gone, Jeremy Corbyn is under severe pressure, and George Osbourne position must be seen as vulnerable.
As much as shock that the result was, the UK has always been a reluctant partner of Europe. It has felt for a long time as if we have been looking for opt out clauses for many pieces of legislation that have been introduced. Over the weekend Angela Merkel did try and calm the pressure coming from within Europe to force us out of Europe quickly.
The equity markets on Friday took a beating as investors feared for the economic implications of the unexpected leave vote. The FTSE 100 initially fell sharply but recovered as the day wore on falling 3%, as the fall in sterling was seen to have benefits for many of our leading international companies. Despite the sharp fall on Friday, the FTSE 100 managed to hang onto some of the gains earlier in the week. The brunt of the losses was felt in peripheral European equities, Spanish equities falling 12% on fears the rejectionists will spread. The FTSE 250 was also hit much harder, falling nearly 8% due to their relative lack of exposure to the international markets. If sentiment towards equities was negative ahead of this vote, it took another notch lower on Friday.
Bond investors benefited from the negative impact, 2-year gilt yields fell to 25bp, half what they were at the start of the day. 10 year yields fell to 1.08%, back to the lows of a few weeks ago. Yields on US treasuries also fell sharply on Friday as investors sought safety in government debt, 2 year yields falling to 0.64%, and yields on the 10 year falling to 1.54% as investors reduced the chance of the Federal Reserve raising rates again this year to very low.
The weeks ahead are likely to be volatile as comments from European leaders and central bankers will be scrutinised. Economic data points will be studied for the impact of the events of the past few days. On Monday we get the flash June US Purchasing Managers Composite Index reading. As we have stated before a reading above 50 indicates an economic expansion below 50 a contraction. Expectations are for a rise to 52 from 50.9 in the previous month.
It is a fairly busy week for UK data, however a lot of this may be seen as historic as the full impact of Thursday’s vote will not be evident. On Wednesday the Governor of the Bank of England is due to make a speech, investors may hope to hear whether he drops any hints as to what the Bank might do if economic activity does weaken post Friday’s events.