Brexit Impact – A Week Later
Last week’s historic vote in Britain sent equity and currency markets into a tailspin on Friday, with U.S. markets falling between 5-6% while Europe and other larger developed markets fell over 10% by the market’s close on Monday. In fact, the British pound fell 11%, as it hit a 31-year low against the US dollar on Monday. The panic from the vote caused a flight to safety, as government bonds and gold rallied. Government bond yields in Europe turned negative while the 10-year U.S. Treasury bond yield fell to its lowest point in four years.
As discussed in our previous blog, the ramifications of Britain’s vote to leave the EU may take years to materialize. The biggest issue remains the political vacuum the vote has created, as a number of UK politicians, including Prime Minister David Cameron, have resigned from office. Therefore, the UK will not officially leave the EU until the new government takes office in the fall. However, results from the Spanish elections over this past weekend alleviated fears of a similar populist movement in that country as the ruling party maintained their leadership status. Therefore, the likelihood of Spain or other countries within Europe leaving the EU has declined. This was a major fear after the British vote and has since dissipated.
Here in the U.S., final Gross Domestic Product (GDP) figures were released this week for the First Quarter 2016. The economy grew at a rate of 1.1% in Q1, which was revised higher than the previous estimate of 0.8%. Personal consumption figures were also released showing that April and May were the best two months of spending since 2009. The combination of strengthening consumer spending, wage increases and continued strength in the housing market, should be supportive of higher GDP growth in the second quarter.
Positive economic data in the U.S., declining fears of a mass breakup of the EU and speculation that policy makers will move to mitigate a slowdown in global growth due to Brexit, caused markets to bounce off the lows hit on Monday. In fact, equity markets have since recouped approximately half of the losses sustained earlier in the week. It remains to be seen if this rally is short-lived, or is the resumption of positive momentum we experienced prior to last week’s vote. Regardless, our expectations have not waivered for a pace of steady economic growth as we head into the second half of 2016 that will be supportive global equity markets.