Financial markets in a state of shock after BREXIT...

Week Commencing Monday 27th June 2016

Overriding Market Themes

Brexit has happened, for better or for worse, the UK has voted to leave the European Union. Chancellor of the Exchequer George Osborne said contingency plans were in place to shore up the economy amid ongoing market volatility as he sought to reassure financial markets after Britain’s shock vote to exit the European Union. Osborne repeated David Cameron’s insistence that article 50, the formal process for withdrawing from the EU, did not need to be triggered until a new prime minister is in place. The chancellor stressed that Britain’s relationship with the EU would remain unchanged for the time being, and presided over a huge U-turn regarding the supposed emergency budget would be necessary within weeks. Before Osborne appeared, British businesses warned that Brexit would trigger investment cuts, hiring freezes and redundancies as the consequences of leaving the European Union threaten to destabilise markets further this week.

The FTSE 100 index dropped by 0.6 percent to 6,105.76, building on 3.2 percent slide from Friday. The moves on currency markets were sharper, with the pound under pressure from worries about the UK’s economic outlook. Sterling continued to fall on Monday, exchanging hands at 1.3437, down from 1.3676 late Friday in New York. Given the enormity of this decision, it is hard to envisage UK markets concentrating on any other story, whether domestic or global. Markets will now continue to trade the geo-politics of this situation and as such expect a wild ride on Sterling markets.
Markets believe that the risk sell-off will likely extend for some time as markets dismissed the leave outcome and now have to think through the long-term consequences of the UK exit. The vote casts a negative sign for the EU's and Eurozone's future. Mostly when looking on the continent, markets are concerned about the implications for some European countries as the probability of holding similar referenda in the Eurozone is poised to increase in the months to come.

Over the coming days your NU Currencies dealer will make contact and discuss various Brexit strategies which can be deployed to help mitigate risks. As always, please contact your NU Currencies contact should you have any questions and/or concerns surrounding this situation.

 

GBP This Week

This week it is prudent to not focus on data releases, instead we will continue to focus on the developing situation surrounding Brexit. We expect Sterling to continue to fall, albeit at a more modest pace as we draw closer to the end of the month. Sterling will be particularly volatile and will likely bounce on any releases from the UK government indicating a clearer picture of the political landscape. Despite this, it is important to note that risk is definitely to the downside and as such we highly recommend a defensive stance.

USD This Week

The US Dollar is one of the likely benefactors of Brexit, with a large amount of capital from both Europe and the UK seeking the relative safety of US treasuries. We expect GBP/USD to continue to be the most volatile currency pair, with the prospect of 1.30 being tested before the week is out. EUR/USD should also continue to see further falls, with 1.08 certainly on the cards.

EUR This Week

GBP/EUR should be more muted, given that this is certainly a Euro-wide negative event. Despite this however, expect 1.20 to be tested.

 

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