*Equity and Currency Impact:
The week began with UK polls indicating that Great Britain would vote to remain in the European Union. Corresponding to the turn in the polls, UK and European equity indexes began Monday with about a 3% gain. The apparent perspective of global equity investors was that continuity in trade agreements would avoid a projected drop in UK economic growth if the UK exited the EU. The global equity rally corresponded to the Dow closing Thursday above 18,000.
At about 3:00am Friday June 24th, Dallas time, the surprising news of the UK voting to exit the EU appeared to shock the global equity markets. Friday morning, Bloomberg showed a drop of over 10% in the European equity markets and a drop of over 5% in the UK equity markets. Early Friday, the Dow in pre market trading dropped over 500 points. The 3% drop in most US equity indexes wiped out nearly all of the gains for 2016.
The British Pound versus the US Dollar dropped to under $1.35 about an 8% drop at the lows for the day.
Oil fell over 5% to under $48 for West Texas Intermediate Crude.
Many bank stocks, even Texas Capital and San Antonio Frost Bank began the day with drops of as much as 10%.
*Bond Market Impact:
Investors appeared to respond by buying large blocks of US Treasuries: The 20 year treasury at the high point of the day was up over 3%. Correspondingly, the 30 Year US Treasury interest rate fell to about 2.4% and the 10 Year US Treasury fell under 1.6%.
CNBC reported that the US Fed was unlikely to raise interest rates for the remainder of 2016.
Fox Business Reported: “Fed Says Ready to Provide Dollar Liquidity After Brexit Vote”
Last week’s program was titled “Compression.” The trend of lower government bond yields was underscored in the global market reactions this week. Interest rate potential to remain “lower for longer” is heightened by the Brexit vote based upon the capital flows on Friday. When the reference rate for bond and equity markets is lowered, by definition, the net present value of future reliable cash flows is increased. Networth Radio has been referencing the term “yield panic” similar to the 2012 market reactions that pushed many high yield and global funds to higher prices. The strategy implications for investors include further potential appreciation in many higher yielding assets. 2012 led to many bond funds spiking to unsustainably high prices with the strategy guidance being a realistic exit point if capital gains are realized in addition to attractive income.
For the future of Great Britain, it remains to be seen if the predictions of economic contraction will actually be realized. While we leave the politics to others, the long term impact on the British economy is not necessarily negative.
We look forward to Summer Planning Season and helping to coordinate your future success.
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