World Week Ahead: Brexit carnage
By Margreet Dietz
June 27 (BusinessDesk) - Following the shock decision by British voters to support a divorce from the European Union, the main focus in the coming days will be the ramifications for the global economy.
Billionaire investor George Soros said, in a commentary published on the Project Syndicate website on Saturday, that a Brexit makes "the disintegration of the EU practically irreversible."
"Britain eventually may or may not be relatively better off than other countries by leaving the EU, but its economy and people stand to suffer significantly in the short to medium term," Soros wrote. “Financial markets worldwide are likely to remain in turmoil as the long, complicated process of political and economic divorce from the EU is negotiated."
“The consequences for the real economy will be comparable only to the financial crisis of 2007-2008," according to Soros.
Also on Saturday, six EU foreign ministers said in Berlin that the bloc needs to move on and avoid a political vacuum; German Chancellor Angela Merkel repeated her desire to avoid “ugly negotiations,” according to Bloomberg.
"Quite honestly, it should not take ages, that is true, but I would not fight now for a short time frame," Merkel told a news conference, Reuters reported. "The negotiations must take place in a businesslike, good climate. Britain will remain a close partner, with which we are linked economically."
The Brexit will top the agenda at a meeting of EU leaders on Tuesday and Wednesday.
Also, investors will scrutinise comments from central bank leaders including US Federal Reserve Chair Janet Yellen at a European Central Bank conference in Portugal. On Wednesday Yellen is set to speak there on a panel with Bank of England Governor Mark Carney, ECB President Mario Draghi and Brazil Central Bank Governor Alexandre Tombini.
Last Friday the British pound and equities sank on the referendum’s shock outcome.
The pound plummeted the most in three decades, while Europe’s Stoxx 600 Index plunged 7 percent.
On Wall Street, the Dow Jones Industrial Average shed 3.4 percent, the Standard & Poor’s 500 Index retreated 3.6 percent, while the Nasdaq Composite Index dropped 4.1 percent.
“Market participants are right to be concerned,” Dean Maki, chief economist at investment firm Point72 Asset Management, told Bloomberg. “This is a legitimate risk-off event. We’re likely to see weaker growth as a result of this, and it’s appropriate that markets are reacting to this.”
“Exports are likely to be weaker and earnings are a function of exports,” Maki noted. “US exporters are going to have to deal with a stronger dollar again.”
For the week, the Dow fell 1.6 percent, the S&P 500 also slid 1.6 percent, while the Nasdaq gave up 1.9 percent.
Instead, investors rushed into the safety of US Treasuries, German bunds, and gold.
Britain’s departure from the EU also altered bets on the Fed’s action on interest rates in the coming months, with expectations for a hike practically wiped out for this calendar year. Instead, some now even predict a rate cut.
Odds of a Fed move by February 2017 plunged to 15 percent from 52 percent Thursday, while the probability of a rate cut before the December meeting rose to more than 13 percent, according to Bloomberg.
To be sure, some remained optimistic.
"I don't think this is a catalyst that's going to cause a bear market in this country at all," Ken Polcari, director of the NYSE floor division at O’Neil Securities in New York, told Reuters. “People should not be going ‘the world is coming to an end.’ It's not.”
Besides Yellen, investors will also watch St Louis Fed President James Bullard, who is set to speak on Thursday, and Cleveland Fed boss Loretta Mester, scheduled for a talk on Friday, for the Fed’s updated outlook amid the EU carnage.
The latest US economic data will arrive in the form of reports on international trade in goods, PMI services and the Dallas Fed manufacturing survey, due today; GDP, corporate profits, S&P Case-Shiller home price index, consumer confidence, and Richmond Fed manufacturing index, due Tuesday; personal income and outlays, and pending home sales index, due Wednesday; weekly jobless claims, Chicago PMI, due Thursday; PMI manufacturing index, and ISM manufacturing index, and construction spending, due Friday.