Global Markets Roiled As The UK Votes To Leave the EU, Stronger USD Weighs On Commodities, ASX SPI200 Futures Up 3 Points

The only news to watch on Friday was the U.K. referendum which voted to leave the EU 52% to 48% and the ensuing market turmoil. Global risk assets dropped as investors rushed to safe havens, the British Pound was hardest hit dropping -8.85% against the US Dollar after initial losses of up to 11.80%. Safe haven currencies were unsurprisingly the stronger performers with the US Dollar Index gaining +2.05%, the Yen gaining +4.09%, Swiss Franc +0.93% and spot gold +4.69% while risk currencies including  the Australian Dollar and Euro dropped -2.13% & -2.64% respectively, the chart below highlights the weakness in the AUD & GBP as the US Dollar index strengthened. Global equities also suffered with all major benchmarks declining, in Asia the Nikkei225 dropped -7.92%, the Hang Seng -2.92% and the ASX200 -3.17%. European equities saw some of the largest losses, the DAX30 down -6.82%, CAC40 -8.04%, Euro Stoxx 50 -8.62%, while the Spanish IBEX35 and Italian FTSEMIB saw the largest declines down -12.35% & -12.48% respectively. While the FTSE100 declined -3.15% many of the constituents of this index are global names with diversified earnings from overseas which somewhat shelters them, a better look into the impact on UK equities comes from the FTSE250 which declined -7.20%. In the US both the S&P500 & Nasdaq100 declined -3.60% & -4.07% respectively. Bond yields also declined, the US 10 year dropping -18.59 basis points, German 10 year -14 basis points to a record low -0.047%, Japanese 10 year -3 basis points, Australian 10 year -24.2 basis points and the UK 10 year dropping 28.7 basis points.

Following the results UK Prime Minister David Cameron announced his resignation stating that a new leader would be in place by October who would then invoke the two year negotiation period under Article 50 of the Lisbon treaty to withdraw from the EU. The current favourite to replace Mr Cameron is fellow conservative party member and former London Mayor Boris Johnson who was the face of the leave campaign. The EU now faces a period of great uncertainty as the UK vote to leave is likely to encourage Eurosceptic parties across European countries from Austria to Sweden and weight on investment amongst other issues including the ongoing refugee crisis. UK business will also feel the impact as they are likely to delay spending and hiring until they have certainty regarding the outcome of negotiations, such declines will impact GDP, unemployment and inflation may see the Bank of England once again cut interest rates and resume its previous quantitative easing program.

Commodities were broadly lower on Friday given the risk off sentiment and stronger US dollar, both WTI & Brent crude oil declined -4.93% & -4.91% respectively, Copper -2.40%, Natural Gas -1.33% and Iron Ore -2.47% while both spot gold & silver gained +4.69% & +2.63%.

Realistically the UK’s decision to leave the EU will not have an overly large effect on the Australian economy given it is not a major trading partner, however it is the uncertainty markets dislike and it is reasonable to expect continued volatility across risk assets over the coming weeks. Given the “risk on” nature of the Australian Dollar we are also likely to see the currency come under further pressure as sentiment weighs on commodity prices and investors move into safe havens included US treasuries pushing the USD higher. A stronger USD will also tighten financial conditions in the US and we have seen global concerns impact the Feds decision to delay hiking rates previously which is likely to be the case moving forward with Fed Fund futures now implying only a 15.3% chance of a hike by December 2016.

This morning we can expect a relatively flat open for the market with ASX SPI200 futures up 3 points in early trade. If you’re interested in trading global markets and still need practice, click here to open a free $100,000 Rivkin Trader account. 



Source: Rivkin, Bloomberg

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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