Brexit sent financial markets into a spin as uncertainty increased - BNZ

Stephen Toplis, Head of Research at BNZ, notes that the UK’s referendum vote last Friday (NZT) to leave the European Union (EU), known as Brexit, has sent financial markets into a spin as uncertainty increased.

Key Quotes

“Below we offer some initial observations.

Impact on markets

• There’s still a lot of water to go under the bridge yet but we already have a sense of the impact on global markets:

• Global market uncertainty and volatility is on the up;

• Increased risk premia will be demanded;

• Emerging markets under pressure in this environment;

• Double digit decline in the GBP;

• UK GDP will take a big hit – this will have some flow on impact;

• EUR also under pressure though non freefall;

• Yen, CHF rising in an unhelpful fashion as seen as "safe-haven" currencies;

• Possibility of currency interventions rises, watch for it;

• The SNB have already taken some action;

• NZD softened but has held up remarkably well for a currency that normally suffers when global risk increases;

• Bond yields falling as central banks expected to be more dovish and as equities come under pressure;

• Bank stocks are falling aggressively. This will put pressure on the need for further capital and could well result in tighter credit conditions. The unknown factor is whether this will largely be contained to UK/EU banks or whether it will spread;

• UK credit rating likely to be downgraded. Ironically, this makes NZ banks look even better.

• Fed to postpone tightening;

• Possibility of emergency monetary easing elsewhere liquidity shouldn't be a problem as central banks can control it.

• Commodity prices under pressure, except gold lifting as it’s seen as a safe haven;

• Heightened volatility to remain;

• Markets are bound to reach a point where they have over-reacted. So beware the eventual correction but we are probably not there yet.

• This is not a Global Financial Crisis nor would the central scenario be that Brexit will trigger one.”