The Aftermath of Brexit

By: Hammond Iles on July 21st, 2016

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The Aftermath of Brexit

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The clearest consequence of the Brexit referendum in the quarter ahead will be political and market uncertainty. And that’s something we just can’t model. While this summation sounds simple and obvious, it is fraught with endless possibilities. What we have learned over the years, however, is to stay the course until we have a better picture of what lies ahead.

Fed Policy
Between the April and June meetings, labor market declaration and increased Brexit fears led the FOMC to back away from further rate hikes. We feel this might be the case for the balance of the year.

Regarding The U.S. Consumer
The United States continues to lead in the area of global economic growth, buoyed by jobs and income, energy savings, and rising wealth. Real disposable personal income is increasing at a healthy pace, rising by roughly 4% annualized in the first quarter.  Auto sales remain high, and housing has been a bright spot that is likely to improve substantially from current price and construction levels.

And Then We Have Energy
Energy has shifted once again. Oil prices rose from lows of $26 per barrel for WTI crude in February to a peak of $51 per barrel in June, supported by favorable supply and demand
dynamics. But here’s what you need to understand: The price of oil moves quickly and contributes to the overall volatility of the global markets.

Even Lower Interest Rates
With economic momentum in Japan waning, the Bank of Japan (BoJ) will be pressured to provide additional stimulus. The ECB could ease further too, but may want to first see whether the recently launched programs to purchase corporate bonds and provide funding at negative rates for banks to lend to businesses is working. Nominal yields on government debt are already deeply negative in Japan and many Euro zone countries. As monetary policies diverge, higher yields in the United States could continue to attract bond buyers while at the same time pushing the value of the US dollar upward.

Looking ahead, we continue to believe the US economy is a place of sustained stability amid a world of continued uncertainty, and that the biggest risks to our outlook are abroad. That being the case, we will continue to participate while being cautious as we await a more sustained resolution.

Brexit

On June 23rd, 2016, 51.9% of United Kingdom (UK) voters decided to leave the European Union. The market reaction was fast and furious with the pound sterling losing about 8.0% against the US dollar on that day. Interestingly enough, the United Kingdom (UK) equity market, as measured by the FTSE 100, lost only about 3.0% on the day after the vote. Given that a stronger yen is negative for Japan’s exporters, the Tokyo Stock Exchange (TOPIX) Index fell by 7.3%. The US markets were more resilient, but were still hit hard with declines ranging from 3.6% for the S&P 500 Index to 4.1% for the NASDAQ.

Please feel free to share this commentary with friends, colleagues and family members. You can find monthly financial market updates and more information about our services at www.hammondiles.com. If you have questions about this commentary or our investment process, please contact us at (800) 416-1655 or clientcare@hammondiles.com.