Market Commentary | Brexit fears dominate financial assets

The negative impact of Brexit has been a long time coming and it appears to finally be picking up the pace. The uncertainty and fear related to the referendum on whether the UK should remain within the European Union is affecting markets negatively overall, in a somewhat predictable way. Equity and high yield fixed income has been under significant pressure, with the Crossover (an index that indicates the perceived credit risk in the market via credit default swaps) deteriorating over 12% since the beginning of June. The flight for safety on the other has resulted in recent record lows for investment grade assets, with the 10 year German bund flirting with the notion of entering negative territory and is currently trading at just 0.027%, up from the low of 0.02% reached on Friday. Imagine for a second investing your money for 10 years and receiving only 0.02% yield to maturity!

Equity markets have been selling off quite violently, with yet another poor start to the week in Europe carrying over from a weak session in Asia, where most equity exchanges were down around 3% as China May data showed stable output growth, but investment, particularly in the private sector, slowed by more than expected. The euro STOXX 600, an index which covers most of the major European companies has conceded close to 6% since the beginning of June, taking the overall return since the beginning of the year to negative 10%.

In all honesty few people can say that they didn’t see this coming as the writing has been on the wall for months now. The decision over Brexit is too close to call at the moment, and the risk associated with the unprecedented exit of a country from the union is spooking investors around the globe.

In the meantime, credit markets are caught in a tug of war between Brexit fears and the CSPP (Corporate Sector Purchase Program) of the ECB. If the remain camp prevails we would expect an immediate rally in most markets, and an unwinding of the risk-off trades. The difficulty at this point is predicting the outcome of the election. Either way, I would expect an extended period of volatility, therefore in my opinion it would make sense to give up the initial gains for the longer term recovery should a favourable “remain” outcome be achieved.

The time could be opportune to load up on solid credits at these depressed prices, however be weary of cyclical credits that would have particular exposure to Brexit risk as these expected to remain under pressure for the time being.

In the week ahead, there are a lot of data releases and events which should impact the market, including the CPI, labour market report and Bank of England meeting on Thursday as well as inflation data in Europe. In the US several data including retail sales, jobless claims and the FOMC meeting on Wednesday to top it off where the consensus is for no changes to take place.

This article was issued by Simon Psaila, Treasury Officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.