Global Daily – Brexit risks intensify

by: Nick Kounis , Roy Teo , Georgette Boele , Maritza Cabezas

Global-Daily-Insight-17-June-2016.pdf (47 KB)


Global Markets – After a pause for breath on Wednesday, Brexit worries returned with a vengeance on Thursday. Polls confirmed that the Leave camp is ahead and Bookmakers odds that the UK would vote to leave the EU rose. Meanwhile, there were also warnings about the impact of Brexit from the Fed and the BoE and perhaps a sense that central bankers were not being pro-active enough to deal with the rising risks, as the BoJ stood pat. Equities were lower but closed higher after Brexit campaigning was suspended following the killing of a UK lawmaker. Safe haven demand was also visible in the government bond market, with Bund yields continuing their slide, marking another set of record lows and peripheral bonds selling off. Meanwhile, Treasuries were also supported by the dovish Fed communication on Wednesday. EU referendum polls will remain in focus going forward, with some political commentators looking for the usual bounce towards the status quo. However, if that fails to materialise, market worries about Brexit will likely continue to escalate in the run-up to next week’s referendum. (Nick Kounis)


Central banks – After Fed Chair Janet Yellen warned that a Brexit could have consequences for the US outlook on Wednesday, it was the BoE’s turn on Thursday. The MPC noted that ‘a vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy’. it added that ‘through financial market and confidence channels, there are also risks of adverse spill-overs to the global economy’. These warnings are disconcerting, with investors concerned about what central banks and other policymakers would do to contain the impact. As well as the usual liquidity provision via swap lines, a number of steps look possible. There could be co-ordinated intervention in FX markets to prop up sterling. In addition, central banks would likely generally move to more accommodative settings. The BoE could step up QE. The Fed could throw its rate hike plans out the window, or even consider more stimulus. The ECB would probably also enhance QE, whereas a further deposit rate cut to weaken the euro would also be an option. (Nick Kounis)


FX – The yen strengthened from 106 to below 104 against the dollar after the BoJ left monetary policy unchanged yesterday. Comments from BoJ Governor Kuroda failed to convince that the BoJ will do whatever it takes to inflate the economy. Kuroda said that it will need some time for negative rates to impact the economy. The yen gave back some of its gains after Chief Cabinet Secretary Suga said that they are extremely concerned about speculative moves which is evident and they will act if needed. Looking at past verbal interventions from Japanese officials, stronger statements using words including ‘excessive’, ‘disorderly movements’ and ‘decisive action’ were used in 2011 when Japan last intervened in the currency markets. Ahead of UK referendum, we could see the yen extend its rally to 101, a level where the risk of currency intervention by Japanese officials will rise materially. Meanwhile, gold prices broke above the April high and surged to a high just below 1316. Gold and the yen are both safe haven assets and are also profiting from a dovish Fed. (Roy Teo & Georgette Boele)


Global Macro – US headline inflation continued to firm in May, mainly as a result of higher gasoline prices, but this was partly offset by a fall in food prices. The overall price index rose to 1%, edging down from 1.1% in April. The core CPI, which excludes the volatile food and energy components rose 2.2% yoy (was 2.1%), with shelter costs continuing to put upward pressure on core prices. At the same time some household-based measures of inflation expectations have slipped, while market based measures remain stable. Chair Yellen mentioned on Wednesday after the FOMC meeting thatĀ  the Fed saw no signs of inflationĀ  pressures and suggested that core inflation was moving up in the expected path towards the 2% goal. We expect headline inflation to continue picking up as the transitory influence of lower energy prices fades. The core PCE, the preferred measure of the Fed rose to 1.6% yoy in April and should continue to increase to the 2% target only in 2017. (Maritza Cabezas)