Brexit-Driven Rollercoaster Rocks Markets

July 4, 2016

Needless to say, markets in the past week have been rocked to and fro by the prior week’s Brexit decision. In the aftermath of Britain’s historic vote to leave the European Union and the resulting political turmoil, global financial markets have reacted in extreme and varied ways.

Immediately after last Friday’s stunning revelation of the UK’s vote in favor of a Brexit, markets responded generally in-line with prior projections. Sterling was expectedly hit the worst, with the GBP/USD exchange rate plunging to a new 31-year low and GBP/JPY experiencing a one-day slide of around 13%. Though the euro was somewhat less affected, it did not escape the carnage. The common currency fell precipitously against its major rivals, with the conspicuous exception of sterling. Meanwhile, safe haven assets like gold, the Japanese yen and to a certain extent, the US dollar, surged broadly as expected on the resulting market turbulence. Stock markets, most notably in the UK, Europe, and the US, experienced immediate and substantial drops on fevered speculation over Brexit’s implications for equities.

By Tuesday of the past week, however, the Brexit-driven market rollercoaster began to shift direction towards a full “risk-on” environment as worries about the UK’s Leave decision started to fade. Heavy pressure was lifted off both sterling and the euro, and safe havens pulled back in response. The most notable change, however, was the dramatic rebound and surge in the equity markets as the Bank of England gave indications of impending stimulus measures and the probability of a near-term Fed rate hike plummeted. The UK’s FTSE 100 index embarked on a meteoric rise, and US stock indexes followed suit. As of Friday morning, these equity markets were on track to book four days of exceptionally strong gains, with the S&P 500 topping 2100 and on pace towards its best week since 2014. Similarly, the FTSE closed its best week since 2011.

While this past week was rightfully dominated by Brexit implications and repercussions, markets in the coming weeks should gradually begin to shift back towards more routine, and less potentially earth-shattering, matters. From the US, a key event after the 4th of July holiday next week will be Wednesday’s release of minutes from June’s FOMC meeting. This should provide a clearer picture of the Fed’s perspective, as the FOMC minutes often contain nuances and revelations that have market-moving potential. Then, of course, will be June’s Non-Farm Payrolls and Unemployment Rate reports scheduled for Friday. After the dismal US employment numbers last month that helped preclude a Fed rate hike, next Friday’s data will be closely watched, along with potential Brexit consequences, for its possible effects on the Fed’s monetary policy stance going forward.

Other major global events next week include the interest rate decision and statement from the Reserve Bank of Australia on Tuesday, followed by key Canadian employment data to be released on Friday concurrently with the US Non-Farm Payrolls.

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