The Brexit Effect -What’s next for Markets

Britain’s Vote – European Union Likely to Disturb British/European Economies

Mentioning that Brexit vote on June 23 which had taken the financial market unaware could be an understatement and the pound, British stocks as well as the Gilt yields had mounted sharply in the week which lead up to the vote but crashed once the results began coming in.

Generally speaking, strategists on Credit Suisse’s Global Markets and Investment Solutions and Products (IS&P) teams anticipate markets to stay volatile in the forthcoming days and for the investors to favour safe assets to the uncertain ones.

 Some of the views have been highlighted from across the bank on how Britain’s referendum vote leaving the European Union is likely to disturb the British as well as the European economies and a broad range of financial resources.

The Economic Impact

The Credit Suisse’s Global Markets and IS&P team are of the belief that the Brexit vote would be creating a considerable amount of uncertainty for British businesses which would eventually lead to a weakening in GDP. Both the teams also tend to believe that the Bank of England would step in with cuts in rate.

Moreover, the Global Markets team believes that the Bank of England to cut rates from 0.5% to 0.05% and had another round of measurable easing to the tune of £ 75 billion which would not be later than August 2016.

Credit Suisse’s Chief Investment Officer for International Wealth Management, Michael O’Sullivan, pointed out that the central banks all over the work seems to be on alert to step in, ensuring that their own banking systems tend to have sufficient liquidity. Besides weak corporate spending, Global Markets economists anticipate growing inflation as well as the decline of the British pound to squeeze household expenditure.

Accordingly, they predicted that GDP would fall 1% between the third quarter of 2016 and the first quarter of 2016 which would have lessened their growth predictions for 2016 from 1.8% to 1% and the 2017 growth predictions from 2.3% to 1%.

Significant Slowdown in Growth

The analysts of Credit Suisse’ IS&P also expect a significant slowdown in growth and the teams contemplate it possible that the deteriorating value of the pound would be causing a front-page inflation to spike. The Global Markets team also seem to anticipate an impediment to the recent pickup in corporate spending especially in Europe together with the tightening of financial conditions.

The economists of the team had dropped their European GDP growth expectations from 1.7% to 1.5% in 2016 and from 2% to 1% in 2017. Credit Suisse’s IS&P team are of the belief that the Eurozone would not be following the U.K. into depression unless the Brexit vote ends in severe financial infection to peripheral economies like Italy. However, the analysts on the team envisage this as a tail risk. The IS&P team are of the belief that the European

Central Bank would lengthen its quantitative easing program whereas the Global Markets team consider that there is a possibility with added easing through the prevailing TLTRO program offering low-interest funding to commercial banks.Credit Suisse’s Investment Committee has downgraded European stocks to neutral as well as British stocks to drift whereas the U.S. stocks to neutral. Moreover strategists of Credit Suisse’s Global Markets had shifted their year-end goals from 6,600 to 6,200 on the FTSE 100, 2,150 to 2,000 on the S&P 500 and on the Eurostoxx 50, from 3,350 to 2,950.

Bank of England Warns Property is a Key Risk to Economy

Bank of England Cautions – Commercial Property Main Key to Economy

The Bank of England has cautioned that commercial property would be the main key to the economy after the Brexit vote. The main concern is that the market from warehouses to office space to retail parks with regards to commercial property is deep distress. Foreign investors, who have purchased commercial property, have made around 45% of all commercial property bought and sold since 2009. The inflow of money to UK seemed to slow down, even before the Brexit vote and dropped by 50% during the first quarter of 2016.

A warning had been given by The Financial Policy Committee that `valuations in some sections of the market, particularly the prime London market had become stretched’. The Financial Stability Report of the Bank points that the real estate investment trust share prices had dropped severely and cautioned about the risk of `future marked adjustment in commercial real estate prices’. According to the translation from Bank of England, there is a risk that commercial property prices may crash.

Considerable amount of most of the valuable prime London commercial property is said to be in the City where some of the foreign investors like banks and investment manager have a

ssisted in financing a powerful and constant session of construction, which have been symbolised by iconic buildings with nicknames like the Gherkin, the Cheese-grater or the Walkie Talkie

Inflows of Foreign Investment in British Companies – Slowed Down

Since 1980, the UK had earned abroad, extremely less selling goods and services than it had spent on imports thus developing a current account deficit. Roughly there was more money going out than coming in. For years it was compensated by attracting money to the UK in two ways.

The first way was that foreign investors had been willing to buy shares in UK companies and lending money to their government. The second was, the foreign companies had been ready in investing directly for instance, constructing new buildings in the City of London or in investing in business such as Jaguar Land Rover in order to turn it into success.

The report of the FPC had stated that all inflows of foreign investment in British companies had slowed down in the approach to the referendum.

Investors’ Belief – Risk in Investing in UK Companies

Investors are now of the belief that they will be taking a risk in investing in UK companies, that are reproduced in share prices, the biggest two-day slip in the value of sterling in more than forty years.There have been some reassuring words in the report. The banks for instance have been stress examined against scenario where the commercial property drops by 30% and residential by 35% with severe recession.Banks tend to have high quality liquid assets of £600bn like shares in top companies, government cash and bonds.

They could endure losses which were double as those undergone in the 2008 crisis without falling short of money. With that security, the Bank of England ruled on that the banks did not need to build up £150bn as a `counter-cyclical capital buffer’. The counter-cyclical buffer is just cash that is kept aside in good times so that it can be made available when the down-swing occurs

Markets Struggle with Brexit Hangover, Pound Sinks

Asian Stocks Dropped/British Pound Plunged – Brexit

Asian stocks dropped and British pound plunged over 2% on Monday while markets wriggled to shake off the uncertainty which had ignited due to Britain’s choice of leaving the European Union. Emotion seemed weak even though the most horrible of the uproar envisaged on Friday when the global stock markets had suffered one of their largest declines in almost five years, had improved. Senior foreign bond strategist at Mizuho Securities, Hiroko Iwaki, had stated that “things are so uncertain that investors still do not have a clear idea how much risk assets they need to sell. But it is safe to assume investors are not yet done with all the selling they need to do. I would not be surprised to see another 10% fall in share prices”. From the several questions regarding the British exit, or Brexit, which have generated are `just how much UK and European economies will slow, how they would negotiate their new relationship and how European leaders would try to improve the collapsing EU’. The world’s most traded stock futures; US S& P dropped 0.4% to 2,011.50, soaring close to the three and a half month low of 1,999 of Friday.

Brexit – First Surprise in Re-Calibration

The widest index of Asia Pacific shares MSCI, beyond Japan, shrank losses to 0.6% since the companies especially with UK exposure were under pressure.Equity strategist at Bank of America Merrill Lynch in Hong Kong, Ajay Singh Kapur had written in a note that they think Brexit could be the first surprise in a re-calibration of the world away from globalisation towards more inward-looking policy making’.He further added that `Brexit has now possibly opened up more uncertainty about the European Union project and that the already crashed down Asian and emerging equity market could receive asset allocation flows from Europe. Nikkei of Japan extended gains to 1.9% which was a fractional rebound after the hefty 7.9% of Friday’s fall. Stocks of Japan had been supported by stronger warnings from the officials of Japan that they would interfere in currency markets in stabilising the yen. However, the dollar still fell 0.3% against the secured yen, trading around 101.81 yen.

Sell-Off in Euro – Exit Referenda Builds

Shares of China also increased with the CSI 300 index as well as the Shanghai Composite both increased around 0.8%. British pound dropped 2% to $1.34, yet some distance from the 31 year low of $1.3228moved during wild trade of Friday. Moreover, euro had also come under additional pressure, falling against the dollar by 0.8% as the investors fret that Brexit would strengthen the anti-establishment mood in Europe and also communicated about breakdown of the union. The chairman of New Sparta Asset Management in London, Jerome Booth, had commented that “there will be sell-off in the euro as talk of other exit referenda builds. This sell-off will be more profound and long lasting and will be not just against the dollar and yen but also against the pound. It would also raise fears of significant loss of values for holders of Eurozone government bonds”. Since December 2010 on Monday, Euro’s weakness aided in pushing the Chinese Yuan to its weakest level against the dollar and dropped to 6.6396 per dollar on opening at 6.6360 a dollar, in comparison with the five and a half year low midpoint level of 6.6375 agreed by the central bank, reaching an intraday low of 6.6469.