Market Commentary | Markets haunted by Brexit

The UK’s possible exit from the European Union is grabbing all the headlines, and it’s not pretty. The approaching referendum vote has put investors into a strong risk off move, pushing risk tolerance levels lower and lower. Understandably then, stocks have once again registered heavy losses in favour of US and core-EUR sovereign government bonds, safe haven currencies such as the Japanese yen and – to a lesser extent – precious metals such as gold.

Throw in a slew of global central bank meetings – the Bank of Japan, US Federal Reserve and Bank of England are meeting this week, although no significant changes are expected – and the market moves seem less abnormal.

Yet another poll in the UK has shown the Leave movement taking a lead over the Remain vote. The Sun has formally backed Brexit (no, it wasn’t on page 3) and doubts are growing whether UK Labour – currently in the opposition – can deliver the votes that Prime Minister David Cameron needs to secure a win for those backing the UK to remain part of the EU.

The pound sterling has taken another tumble, briefly surpassing yesterday’s lows as investors worry about the diminished purchasing power of the currency in the event of a Brexit, and 10-year Gilt yields fell to 1.12% intraday. Sovereign bonds have been, as customary, the standout performer. In Europe, 10-year Bund went negative for the first time in history. Europe’s powerhouse joins Switzerland and Japan as the only countries whose benchmark 10-year bond trades with a negative yield.

Demand for bonds at these levels shows the extent of safe-haven demand. Virtually no one buys bunds (or their equivalents) at these levels for the yield, but as a hedge against uncertainty. While the collapse in yields is good news for governments that can borrow at lower rates (or make investors pay to lend!) it’s a sign that even after a record amount of stimulus, central banks are still struggling in their efforts to boost growth and inflation.

In one of the few bright spots for the day US retail sales rose strongly in May, easing fears of a slowdown in the US. Car sales increased despite higher prices at the pump suggesting growth in gathering steam. A slow but steady inflation pick-up also looks likely from the data, as import prices jumped by the most in four years. Based on this set of data, economists estimate consumer spending – a component which account for almost two-thirds of US GDP – was growing at an annualized rate of around 3.5%. As a result, the Atlanta Fed raised its second-quarter GDP estimate to 2.8%, although this data point alone is unlikely to have a material impact on the upcoming Federal Reserve meeting.

This article was issued by Andrew Martinelli, Trader 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.