The Global Markets Weekly – 6/27/16

Posted June 27, 2016 by rvillareal

If the U.K. Can Brexit, Can the U.S. Trump?[private]

Global equity markets are reeling Friday, caught over their skis by the U.K. vote to exit the EU.  Investors were led astray by wishful thinking as well as inaccurate polling and betting pools.  This is day with many questions but few confident answers.

In the U.K., the stock and currency markets got hammered, more than reversing the recent rallies since the economic consequence of leaving the EU are so grim– markedly heightened uncertainty from the as the ensuing damage to business confidence and financial intermediation, alongside negative wealth effects affect the real economy, firstly through a hit to capital spending, this in turn damaging employment and then the consumer.  The scale and timing of such effects are impossible to gauge, certainly at this juncture.

Much will depend on how politicians deal with the complicated series of negotiations the UK and the EU faces, as well as the ability of central banks to smooth financial market and banking turmoil.  The posturing to date has seen the EU maintain that the UK will be dealt with harshly and that the Brexit decision is irrevocable.  Others (particularly the Brexit camp) have argued that the looming divorce from the EU can be conducted in a more considered manner, with the EU far from holding all the cards.  A fresh referendum is possible, some think, as nothing is really written in stone.

For Europe, the consequences are serious and almost as grim as the exit vote increases the chances of the already strained EU and euro falling part as other nations attempt to follow Britain’s lead.  The euro fell sharply as did European stocks.  No surprise, safe havens like the Swiss franc and U.S. Treasuries advanced.

For the U.S. and the rest of world, the question becomes can it happen here?  And how much could the eventual damage in the U.K. and Europe spillover?  Could Brexit become a Minsky moment?  Worries about establishment and globalization are not unique to the UK electorate and therefore politicians will now be even more aware of how fickle their own electorates may be.  If the U.K. can Brexit, can the U.S. Trump?

• S.: Turmoil in the credit markets should persist into next week, increasing attention on the upcoming consumer confidence figures (Tu). Investors will worry that confidence can only go down in reaction to ongoing turmoil, making the wobble in the Michigan survey this month in reaction to the hiring slowdown more worrisome.  And if confidence falls, is spending next to crumble?  But we should remember that confidence held up well when the markets crashed in January.  The ISM mfg. survey (Fri) should be steady.
• Eurozone: It is unclear to what extent the political fall-out in Europe from the UK Brexit decision will have economic consequences in the Eurozone. What is clear, however, is that the Eurozone is in a better shape to deal with any such fall-out, this being evident in the most recent survey numbers, such as the EU Commission business and consumer survey data (Wed).
• UK: The UK, Europe (and in particular the EU), as well as much of the rest of the whole world, are now in unchartered waters, to the say the very least, now that the UK has voted to leave the EU. What may be painful and protracted discussions lie ahead between the UK and the EU, with the likelihood being that if the downside economic risks related to the Brexit vote materialize, the EU may even offer the UK more concession that could even see the UK consider a fresh referendum.
• Japan: Key data week as activity indicators including retail sales (Wed), industrial production (Thu), and the Q2 Tankan Survey (Fri) will inform BOJ decision-making, along with what are likely to be another set of soggy CPI data due on Friday as well.
• China: This week brings manufacturing PMIs (Fri).
• Other central banks: Central banks in the Czech Republic (Thu), Taiwan (Thu), and Mexico (Thu) will meet to set policy in a suddenly more uncertain global environment.

gmw_0624[/private]