The British are leaving – Wells Fargo

Research Team at Wells Fargo, suggests that while the Brexit vote does not immediately take Britain out of the EU, the British Parliament is expected to invoke Article 50 and request to leave the EU.

Key Quotes

“The surprising vote tally, at least from the financial markets’ perspective, pushed long-term yields back near cycle lows and has reduced expectations for future interest rate hikes by the Federal Reserve both in the near term and over the long run.

We have not changed our forecast, as of yet, and continue to have two quarter point hikes in 2016, just as the Fed’s latest dot plot shows. The financial markets clearly have their doubts. The federal funds futures curve does not have a rate hike it in until sometime in 2018.

Caution should be utilized when assessing the interest rate environment in the immediate aftermath of the Brexit vote. While the surprise outcome has led to even more heightened uncertainty about the global economic outlook, the financial markets should settle down once we have some clarity about how a British exit from the EU will proceed and what the fallout will be on the European economy. Global central banks are likely to provide additional liquidity as financial market participants reset their expectations for economic growth and monetary policy.

As far as the impact on the U.S. is concerned, the direct effects of Britain’s exit from the EU are rather small. Britain accounts for just 4 percent of U.S. exports and exports account for just 0.4 percent of U.S. GDP. The secondary effects, however, are less certain and potentially quite significant. The dollar will strengthen in the near term and the global economy will likely be weaker. Commodity prices will also likely reverse some of their recent gains. In addition, there is less appetite for risk, which will widen credit spreads. The critical question is will these adjustments trigger an event in one of the many possible flashpoints around the world? Fed policy will remain on hold until there is a more definitive answer to this question.”