A historic week and month for equity markets drew to a close on Thursday, as the FTSE all world index climbs back close to where it started the year. The first six months can be broken into two segments, the first quarter fears of a US recession, that has so far not materialised. The second quarter the fears over the Brexit referendum which did materialise, as we know. What the second half of the year will bring only time will tell.
We wrote a piece a couple of weeks ago entitled “have you ever been hugged by a bear”, one has to suspect that the same bear came charging from the woods in the past couple of days to grab a few unsuspecting traders. A 10 pct rally in FTSE 100 from the lows of the start of the week smacks once again of a bear market rally, as those who looked to hedge positions over the Brexit vote tried to cover those positions. The FTSE 250 has recovered the losses from earlier in the week, but not made the gains the 100 has made, this could be as much for technical reasons as economic ones.
George Soros, a man famous for profiting from another moment the UK turned its back on Europe when it left the ERM in 1992. Even though he did not apparently bet against sterling this past week recent reports suggest he is once again becoming very bearish on the outlook for equities. For a change, at these times, he does not seem a lone voice. On Thursday he expressed the view that Brexit has unleashed a financial market crisis similar to that of 2007/08.
If one thing 2007/08 has left the world with is a heightened sense of the unintended consequences of not acting quickly, or letting events unfold with now certainty to the outcome, Lehman comes to mind at this point. Central bankers and governments one would suggest are not about to oversee the risk of Britain leaving the UK in a disorderly manner. This view is quite possibly what is also partly driving equity prices higher.
At some point markets will once again focus on more mundane matters such as global growth, but that's for another day