Market Commentary | Financial Markets Roar Back following Brexit

Safe to say that Monday was a panic stricken day, where a large flight to safe haven assets resulted in significant upward swings in the prices of Gold, the US dollar and the German Bund. On the flipside, risk assets sold off in a significant, albeit not particularly crippling manner.

By the end of the week though, things turned bottom side up. The only sustained change is a significantly weaker British pound, currently trading at GBP 0.83564 / Eur from previous levels closer to GBP 0.77 before the referendum. Safe haven assets also remained in demand.

Last week saw a number of European equity markets record their best week in a month. The Stoxx 600 (+0.72% on Friday, +3.19% over the week) had its best week since the end of May along with the DAX (+0.99%, +2.29%) while even more impressively the IBEX (+1.29%, +6.18%) had its best weekly return since October last year.

A market index that has caught me off guard in terms of reaction and performance over the week is the FTSE 100. Despite Brexit, the British index was the best performing European index and closed off the week a whopping 7.15% higher. This left quite a few people, including myself quite surprised. Upon further inspection, the reasoning became more evident. As many companies listed on the FTSE 100 are large international companies that generate most of their revenues in foreign currencies, a significant weakening of the British pound would directly impact the financial statements of the British firms in a positive manner. Indeed, the sterling sold off around 8.5% as of this writing which is in line with the performance of the index.

It was much the same in credit markets too. In Europe the iTraxx Main (-5bps Friday) and Xover (-22bps Friday) closed the week just 4bps and 26bps off their pre-referendum levels on the 23rd. The peripherals were the standouts in the sovereign bond market where 10y yields in Italy, Spain and Portugal closed the week 32bps, 48bps and 33bps lower respectively reflecting excellent performances for the week.

Of note last week is that the Swiss yield curve turned completely negative, along with a number of other eye watering record lows being achieved. Commodity markets also joined in the global rally. Gold was up +1.32% over the week, Silver +11.35%, Copper +4.53%, Nickel +10.53% and WTI Oil +2.83%.

The performances in asset prices definitely threw water on the previous Brexit fears as the focus turned towards the reaction of the Central banks, who justified their pay checks by calming investors and pledging support. One market which is struggling to keep up is European Banks however. The Euro Stoxx Banks index was down -0.88% last week and is nearly 19% down from its pre referendum levels. Italian Banks are at the heart of that weakness and the uncertainty related to this situation is becoming ever more forceful due to the systematic stress involved.

As a reminder to readers, US markets are shut today due to Independence Day.

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.