- Brexit is and will remain the main driver in financial markets and it will certainly take months before the smoke clears and uncertainty returns to any form of normality
- In Europe, risk sentiment is set to worsen further as markets realise that the uncertainty stemming from Brexit is not only here to stay, but also that the contagion is likely to spread
- GBP/USD may further weaken as will the Norwegian krone, one of the countries most exposed to the UK market
- The yen is trading slightly higher and has managed to remain above the 100 threshold
- Despite the SNB’s FX action, the CHF is still holding below 1.08. Consequently, traders should be mindful of a potential for further, more significant intervention from the SNB.
- We believe that in the long run Brexit is in fact good news for Switzerland as it may give them a better edge to negotiate commercial partnerships with a smaller UK
Brexit is and will remain the main driver in financial markets and it will certainly take months before the smoke clears and uncertainty returns to any form of normality. In Japan, the Nikkei and the Topix indexes partially recovered from Friday’s massive sell-off. The latter rose 1.77%, while the Nikkei was up 2.39%. Mainland Chinese equities partially reversed last week’s losses, suggesting that the market overreacted - to some extent - to the Brexit vote. However, in Europe, risk sentiment is set to worsen further as the market realises that the uncertainty stemming from the UK’s decision is not only here to stay but that it is likely to grow over time. The UK must now negotiate its exit out of the EU and with a country that appears more than divided than ever - Scotland is determined to secure its position within the EU and is ready to leave the UK, while Northern Ireland will also likely make a move in the same direction - with politicians resigning at every twist and turn and an EU that wants Britain out as soon as possible, the months ahead will be rough and choppy in the financial markets.
European equities took another blow on Monday, failing to follow the Asian lead. Futures on the Euro Stoxx 600 were down 0.97%. In the UK, the Footsie was off 1.77% amid mounting political uncertainty following David Cameron’s resignation on Friday as well as the several Labour official resignations on Sunday, putting Jeremy Corbyn’s leadership of the party in question. In Switzerland, the SMI was off 1.17% and the French CAC was down 0.79%.
In the FX market, the pound sterling took another hit on Monday after falling 9.30% on Friday against the US dollar. In Tokyo, GBP/USD fell another 1.80%. In Norway, one of the countries most exposed to the UK market, the krone was off 2.33% against the US dollar, with USD/NOK jumping to around 8.60. The Japanese yen was trading slightly higher and manged to remain above the 100 threshold.
After hitting 1.0623 on Friday morning and bouncing back to 1.0880, EUR/CHF consolidated at around 1.0750 after the Swiss National Bank declared it was intervening in the market to stabilise the Swiss franc. Before the Brexit vote, we were wondering whether the central bank would have enough fire power to face a Brexit situation. It is clear now that the market still fears the SNB and is confident that the institution is strong enough to face such situation. We are now awaiting the release of SNB data which will reveal the extent to which they have actually intervened in the FX market.
Yann Quelenn, market analyst: “What next? The surprises did not end on Friday with the weekend full of resignations and striking declarations from European Leaders. Merkel and Holland must now make an example of the UK and are prompting them to leave as soon as possible to limit contagion and to make it clear to other member states that there will be no room for negotiation.
For now there is mounting noise on the market of a second referendum. For the time being Article 50 has not being triggered by the British government so there is still a chance for Britain to remain in the Euro. Examples exist, referenda are not always legally binding and history has unfortunately shown that the people’s voice is not always respected. The French Lisbon Treaty in 2005, which people voted against and the famous OXO vote in Greece against Austerity are both examples.
This is why we believe that within the next months, there will be continued turmoil in the financial markets as we all wonder just when, if ever, will the British government trigger Article 50? Everything hangs on this question as only then can markets begin to appraise the impact. Until then, uncertainty reigns. The pound staggered again at market opening, losing more than two figures before bouncing back. Gold and silver are now consolidating but are still trading around their highest level in two years.
For now all eyes are on the central banks which were on hold waiting for the results of referendum. In the US, Fed Futures indicate that the probability of a no rate hike for this year is higher and that there is now a non-zero likelihood that rates will be cut before year-end as there is fear that the Brexit bombshell will weigh on exports.
In Switzerland, the SNB is already intervening to prevent any further appreciation of the franc. Despite FX action, the CHF is still holding below 1.08. Traders should stand ready for larger intervention by the SNB. However, we believe that a Brexit could have positive consequences for Switzerland in the long run as it may give the Swiss increased leverage to negotiate commercial partnerships with a now weakened and fragmented UK."