Brexit: Financial Markets React Violently – What Now?

Friday was a historically volatile day across the global financial markets as nearly every asset class experienced significant price swings. Markets had become somewhat complacent about Britain remaining in the Eurozone in the days ahead of the vote – stocks, commodities and the British Pound rose early last week while bonds such as U.S. Treasuries and German Bunds sold off. Friday’s reversal left the Pound at its lowest level versus the dollar since 1985, U.S. equity indices in negative territory for the year and U.S. 10-year Treasury yields at their lowest levels in nearly four years. The question now turns to what this means for the UK, European and global economies. Many economists are calling for a slowdown in growth in the UK and Eurozone, both of which were merely crawling along before the vote. Over the next couple of years, the UK will have to re-write laws and trade agreements, which could stifle business investment for the foreseeable future. It may also cause the populist movements in other parts of Europe to gain strength, creating another layer of uncertainty. In general, uncertainty is bad for confidence, which is a big reason why markets reacted the way they did.

For U.S. bond investors, the important points are as follows: 
- This almost certainly pushes back the timing of any subsequent rate increase by the Fed, as a stronger dollar will dampen inflation and hold back exports, and lower global growth will pressure the U.S. economy.
- Low rates around the world will continue to drive assets into U.S. Treasuries.
- The U.S. corporate bond market has seen resilient performance, though further opportunities may arise. 

Please let our Client Service Team know if you have any questions or comments. We’ve been positioning portfolios for heightened levels of market volatility, so this market environment brings us more excitement than fear. 

Source: Bloomberg, RBS