The recovery continued for risk assets, with the market continuing to reverse the losses seen in the immediate aftermath of the shock UK vote.
Equity markets are strong, with Europe’s Stoxx 600 up 3.1% and the S&P500 currently up 1.6%, following on from similar gains yesterday.
A consensus view is emerging that the shock will be isolated to the UK itself, with little spillover for the rest of the world. Central banks will deliver further easing and, in the case of the Fed, will delay any tightening for potentially a long, long time. Many suggest that Brexit might not even occur with the UK never invoking article 50 that would trigger the withdrawal process. This optimistic view is behind the significant recovery in risk assets. It remains to be seen whether the optimistic view is the correct one. What we can be sure of is that there are months and quarters ahead of potential flashpoints that could easily tip this view on its head and that market volatility will be here to stay.
The EU summit wrapped up, with leaders taking a tough line on the UK. They agreed that the UK couldn’t cap migration and expect unrestricted free access to the single market, dampening some expectations for a Brexit-lite type of deal. In their final statement released they noted the “need to organize the withdrawal of the U.K. from the EU in an orderly fashion” and that “this should be done as quickly as possible.”
In currency markets the USD is down across all the major currencies, with the decline fairly orderly and moderate, with the DXY index down about 0.5%. The weaker dollar has provided a boost to commodities, with the Bloomberg commodity price index up 1%, following yesterday’s 1.9% gain. Oil prices are back close to the $50 mark, helped by data showing the sixth weekly decline in US crude inventories and lower-than-expected global crude supplies last week.
This has helped boost the commodity currencies, with the NZD up 1% to 0.7120 and the AUD up 0.7% to 0.7440. The NZD got an added boost yesterday following new data showing a downward revision to NZ’s unemployment rate. We maintain our view that the NZD has more downside than upside risk into the second half of the year. We’d be surprised if the recovery in risk appetite extended that much further.
GBP is up 0.7% to 1.3435, continuing its recovery, although it has slipped a cent since peaking early this morning. EUR is up 0.4% to 1.1110, while USD/JPY is down 0.2% to 102.55.
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