Brexit not as bad as expected outside of UK

Inflows into gold ETPs of US$263mn on Friday 1st July were at their highest since inception, Brexit has also driven large inflows into other safe haven assets such as silver and Swiss Franc

Britain’s unexpected decision to leave the EU triggered a market panic on Friday 24th and Monday 27th as assets sold-off. Prices however began to rebound on Tuesday with some cyclical assets returning to pre-referendum levels, suggesting that the market believes the economic impacts of the Brexit vote may be limited to the UK only.

UK negative sentiment to continue until more is known on its formal exit.
While the rest of the world may be safe, a lot of question marks remain on the future of UK and how the government under a new leadership (which is still yet to be determined), will prepare its exit. After plunging 12.6% against the USD and 9.1% against the EUR since Friday 24, the pound remains at a record low compared to its pre-vote level. The FTSE 100 index, on the other hand, erased all its losses, and is up 3.6% since the day of the vote. However, the FTSE 250 index which has a higher proportion of stocks with UK-dependent revenues remains at 6.3% below it pre-vote level. Short GBP ETPs saw inflows of US$20.5mn on profit-taking while short UK equities saw inflows of US$10.8mn over the past week. The divergence between EU and UK leaders will likely continue to fuel uncertainty in the UK market despite Carney reassuring words about the Bank of England’s firepower to support the economy.

Demand for safe haven ETPs rise as uncertainty continues. Last week saw long gold, silver and long CHF recording strong inflows of US$433.5mn in total.
Inflows into gold ETPs of US$263mn on Friday 1st July were at their highest since inception. Gold and the Swiss Franc have historically been sought after for their safe haven traits allowing investors to hedge portfolios from downside risks. We expect demand for haven assets to remain elevated as uncertainty surrounding the UK’s leadership contest and its formal exit from the EU block remain high. While the Bank of England is preparing for more monetary policy easing, Deutsche Bank and Santander failed the US Federal Reserve stress test again, keeping investors nervous.

European stocks near 2016 lows triggered interests in long European ex- UK equities. ETP investors have been implementing the tradition of “Buy low sell high” rule last week as prices fell to February lows. Long European ex-UK equity ETPs recorded inflows of US$20.2mn, led by Italy and Germany while UK equities recorded inflows into short ETPs. Investors clearly view the Brexit as having more negative impact on the UK economy than on EU members. This has been exacerbated by the downgrade of UK credit rating from triple A to AA by all three credit agencies. Last week meeting with EU leaders set the tone for the UK forthcoming government: no “cherry picking” and no informal negotiation. As the clock is ticking for UK, stock markets are not sheltered from another upheaval by Q4.

Key events to watch this week. Monday is the US’ Independence Day. Investors will continue to follow Brexit and its implications for UK and EU economies. ECB Draghi is due to speak on Monday while US Fed will release its minute on Wednesday.
Several PMI data for June are due for release over the course of the week.

Edith Southammakosane – Multi-Asset Strategist – ETF Securities