European Opening Calls:
Euro Stoxx 50 2830 -208
FTSE 5862 -476
DAX 9575 -682
CAC 4158 -308
Brexit Fallout
The surprise “Leave” victory in the UK’s Brexit referendum has changed the calculus of global markets. We have seen the
biggest intra-day volatility in the pound on record, as evidenced by it hitting a yearly high and yearly low within
hours of each other. But the biggest concern for markets is what the implication of Brexit will be for the European
Union. There is a strong incentive for the EU to make the UK’s exit as punitive as possible to severely diminish the
risk of other members making the same move.
Speculation in the markets will increasingly focus on the weakest links in the EU, those who are most likely to elect to
leave and those who would suffer most under the breakup of the EU. The PIGS (Portugal, Italy, Greece, Spain) are likely
to fall under the intense focus of speculators again. Spain also has elections on 26 June and this Brexit vote will
likely have a major influence on its outcome.
It is also very uncertain what this will mean for Britain and what sort of timeframe Britain’s exit from the EU will
take. Many expect Prime Minister David Cameron to stand down, possibly to be replaced by either Michael Gove or Boris
Johnson. But whoever becomes the UK Prime Minister, the primary concern will be quelling market concerns and providing a
steady timetable for Brexit to the market.
Safe havens have been surging, the Japanese yen has strengthened 4.4%, Gold has rallied over 6%, and Bitcoin is up 10%.
There is increased speculation that the Bank of Japan (BOJ) will be forced to intervene to stem the strength in the yen,
particularly given it a one point broke below USD/JPY 100 – a red line for the BOJ.
Coordinated intervention by global central banks and G20 governments may be necessary to stem the selloff. But when
there is so much division in Europe at the moment it is difficult to see how they can come together and present a
unified case that will reassure markets.
For Australia this is likely to lock in the Turnbull Liberal government’s election as the economy and economic security
will probably rocket to the forefront of voters concerns. While it’s difficult to foresee the exact Brexit fall out,
there’s now a chance we see a RBA rate cut at the 5 July meeting and were that to happen another one or two more rate
cuts could follow it in 2016.