Markets were volatile last week, with investors fearing Britain will vote on June 23rd to leave the European Union (EU). The 10-year U.S. Treasury rallied from 1.64% to 1.53% intra-week, the SPX index fell almost 2%, gold was up and oil was down. Interest rate volatility jumped, as shown in the MOVE Index chart below. All measures were beginning to recover as the week drew to an end.
Leave or stay, Brexit is just another sign the EU is pulling itself apart. A monetary union without fiscal or political unity is unstable. It was the hope in Brussels that the passage of time or an opportunistic crisis could bring Germany to the table to pay the bills, and France to the table for structural reforms. This isn’t happening. Immigration and sovereignty issues on top of economic hardship have pushed Greece to the edge of departure, have brought Catalan separatists to the fore and are driving right-wing anti-euro nationalist parties into greater prominence in Germany and France. Even without a Brexit, the general elections in Europe in 2017 could be as interesting as our 2016 election! Nonetheless, Mario Draghi is trying to buy time for the EU experiment by juicing the economy with ultra-low rates and large amounts of quantitative easing. Time may be running out.
A less politically stable Europe makes markets more volatile. A leave vote would most certainly lead to greater immediate volatility, though a no vote may just offer a temporary reprieve. These signs have been around for some time, which is why your portfolios are positioned conservatively and prepared for higher market volatility.
The MOVE Index – A Measure of Interest Rate Volatility