The Global Markets Weekly – 6/21/16

Posted June 21, 2016 by rvillareal

Brexit Not Greece Is the Word[private]

The Fed (non) decision is finally behind us.  Now that Fed chairman Yellen has admitted that a summer-time policy rate hike is “not impossible,” investors can continue to think there is little chance of another hike until September, unless job growth rebounds enough next month to have the Fed change its tune yet again!

This makes the upcoming Brexit referendum Thursday, which could have enormous ramifications for the outlook, the main event this week and perhaps this year.  While opinion polls have showed a narrowing of the vote, most analysts including DE think the remain vote will win, particularly if the large percentage of undecided swing towards the camp to stay in the EU.

The consequences of an exit are virtually impossible to predict with much precision, as we discuss in more detail in the focus section of this issue.  Still, virtually all economists think the impacts would be adverse and large.  Stock markets will be clearly buffeted by a Brexit, hit obviously by the heightened uncertainty, although central bank liquidity action may act as a pressure valve.  As already seems to be the case, sterling is likely to be the main casualty from any Brexit rather than UK bonds,  Sterling is also vulnerable because of the huge (7% of GDP in Q4 2015) current account gap.

The euro would most likely suffer as well, hit by worries over EU break-up.  Safe haven currencies, such as the dollar, Swiss Franc,  and even the likes of the Swedish Krona would be potential beneficiaries.

If a Brexit vote carries the day, there is no precedent for what may unravel.  With the ruling conservative party deeply dived on the issue, what British government could be cobbled together to negotiate an agreement, whose transition might take two to three years?  Despite all the suggestions to the contrary from the EU hierarchy, the likely financial market turmoil and damage to business and financial market confidence that a leave vote may entail may swiftly persuade the EU to make fresh concessions to the UK, leading to a fresh referendum in the following 12 months.

• S.: The big events will be Fed Chair Yellen’s appearances before the Senate (Tue) and House (Wed) committees to testify on monetary policy. The Fed Chair gave a quite exhaustive press conference last week, but there is always the possibility that policy-relevant soundbites hit the tape. The June statement sounded a bit more dovish and the FOMC dot plot shallowed yet again, but Yellen continued to reiterate that every meeting is “live”. The gap between market pricing and the Fed remains wide, even with the shallowing dot plot. May durable goods (Fri) are also due.  Capex has been weak recently, the most visible sign of secular stagnation.
• Eurozone: More likely than not, still-solid PMI readings are likely to continue with the June updates due on Thursday. These PMI readings are likely to highlight even more clearly the strength in Eurozone domestic demand currently, something corroborated by the likes of ECB bank lending surveys and the Q1 GDP break-down. Otherwise, the ECB will unveil the allotment results of its first TLTRO (Version II) on Friday, these now seeing an even more favorable interest rate (ie possibly even negative) on offer to banks who agree to increase lending.
• UK: Clearly, the EU Referendum on Thursday takes center-stage this week, with markets all the more wary given the strong showing the Brexit camp has shown in the most recent opinion polls. From the DE perspective, a ‘remain’ vote is still the more likely result.  More likely than not by 4am BST Friday there should be pretty clear picture of which way the vote is going, although a formal result may still not be made until a few hours later, especially if the result is close.
• Japan: BOJ Governor Kuroda will speak on Monday in the wake of last week’s decision to keep policy levers unchanged, and amid what remains a clear case for action in July.
• China: There are no indicators of note next week.
• Other central banks: In Turkey, the central bank is expected to cut the lending rate 50 bps, in line with consensus forecasts.

gmw_0617[/private]