11 July 2016
June on the stock markets was dominated by ‘Brexit’, as investors fixated on the lead-up to the referendum on the United Kingdom’s European Union (EU) membership – and after 23 June, on the decision of the British electorate to leave the EU. Markets saw a sharp sell-off on the result, which triggered worries about effects on the UK economy and global economic growth, as well as political risk in Europe, hitting bank stocks in particular.
Brexit vote roils markets
The day after the UK referendum result came through saw mayhem on the markets. In the early hours of that Friday, the UK pound plunged 11.3 per cent, from US$1.50 to $1.33, a level not seen since 1985. The FTSE 100 Index dropped 8.7 per cent in response, as London Stock Exchange trading volumes hit an all-time high. Germany’s DAX Index was down 6.8 per cent, France's CAC 40 fell 7.9 per cent and in Madrid, the Spanish market ended the day down 12.7 per cent, its worst fall ever. The STOXX Europe 600 Index lost 7 per cent, while its Banks sub-index plummeted 14.5 per cent.
In the US, the S&P 500 shed 3.6 per cent, while the Dow Jones Industrial Average lost 3.4 per cent – virtually bringing it back to square for the year – and the Nasdaq Composite Index lost 4.1 per cent, its worst fall since 2011. The UK lost its last AAA ratings (from Standard & Poor’s) and it was an historic occasion – the first time a ratings agency had ever cut a AAA sovereign rating by two notches, to AA – with ‘negative outlook’ thrown in for good measure.
The second post-Brexit trading day – Monday 27 June – saw further falls, as investors continued to dump ‘risk’ assets. The FTSE 100 dropped another 2.6 per cent, while the CAC 40 and the DAX both eased about 3 per cent, pushing the STOXX Europe 600 to a 4.1 per cent loss (the STOXX 600 Banking index lost a further 7.7 per cent.) In the US, the Dow Jones lost a further 1.5 per cent, while the S&P 500 shed 1.8 per cent and the Nasdaq Composite 2.4 per cent.
The market plunge was brutal, with US$3 trillion wiped off share values in the largest two-day fall in history. But the sell-off reversed after two days, as it became clear that UK politicians were in no rush to start Britain's formal exit from the EU. Markets were also boosted by comments from Bank of England Governor Mark Carney, who said the central bank was ready to pump more stimulus into Britain's economy. This drew supportive words from other global central banks, with expectations heightening that the European Central Bank (ECB) and the Bank of Japan (BOJ) in particular could unleash more quantitative easing in the months ahead.
Fed goes back on hold
Brexit also quashed expectations for a near-term US interest rate hike by the Federal Reserve, with markets not now expecting a Fed move until late 2017. No change came out of the June meeting, which was no surprise after the very weak May jobs report for the US, and the Brexit vote uncertainty.
Also before the Brexit vote, the World Bank slashed its forecast for global economic growth as stronger headwinds buffet both emerging markets and developing economies.
The 2.4 per cent growth forecast for 2016 is down 0.5 percentage points from January 2016's prediction, and would represent no change from what the Bank called the "disappointing" growth of 2015.
The downward revision was driven by weaker growth among advanced economies, low commodity prices and “lacklustre" global trade and capital flows, said the World Bank. The World Bank is forecasting the Chinese economy to grow at 6.7 per cent in 2016, down from 6.9 per cent in 2015.
Given all the volatility and uncertainty, it was a surprise that many markets did quite OK for the month. After the two-day mini-crash, the FTSE 100 Index actually ended June in the black, up 4.4 per cent – but its European counterparts were not so fortunate. The CAC 40 and the DAX lost 6 per cent and 5.7 per cent respectively. The broad European STOXX 600 Index ended June 5.1 per cent lower, its worst monthly performance since January.
In June the Dow Jones Industrial Average gained 0.8 per cent, while the S&P 500 added 0.1 per cent. However, the Nasdaq Composite Index lost 2.1 per cent. In Tokyo the Nikkei was belted to the tune of a 9.6 per cent for the month, but the other major Asian markets were relatively unscathed by Brexit, with the Shanghai Composite adding 0.4 per cent in June, while the Hang Seng eased lower by 0.1 per cent. The Nikkei was not helped by weak Japanese manufacturing data, which led to short positions on the Tokyo Stock Exchange rising to highest level for more than five years.
Over the June quarter, in the US the S&P 500 rose by 1.9 per cent, the Dow Jones added 1.4 per cent while the Nasdaq fell by 3.7 per cent. In Australia, the ASX 200 rose by 3 per cent, the Japanese Nikkei fell by 7.1 per cent. In Germany the DAX lost 2.9 per cent, while the UK FTSE outperformed, up 5.3 per cent over the quarter.
Investors flock to sovereign bonds, gold
Naturally, some assets benefited from the Brexit turmoil: sovereign bonds and gold, the traditional safe haven. Gold pushed 8.5 per cent higher in June alone, to be up 24.6 per cent in the first half of 2016, and at two-year highs. (In $A terms, gold surged 15.6 per cent in June to $1,773.53 an ounce, a record high.) Those investors not piling into gold after Brexit were heading for the bond markets, with virtually no thought of yield; according to Fitch Ratings, the global total of sovereign debt with negative yields was a staggering $11.7 trillion as of 27 June, up $1.3 trillion from the end May total. By the end of June, all sovereign debt maturities in Switzerland, Germany and Japan carried a negative yield.
As the month ended, concern moved to Italy where the Italian government was given the green light by the European Commission to provide as much as €150 billion (US$166 billion) in liquidity to its troubled banks.
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