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Post-Brexit Blues

The past couple of days have seen the first of the economic indicators from the post-Brexit referendum period published. And the news has been predictably depressing.

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Political Anarchy, Economic Calamity

One week on from the seismic referendum result and the only thing that’s clear is that the UK is in the midst of its deepest political crisis since at least the Second World War. And this uncertainty is having profound negative economic consequences. There are any number of reasons to now expect a much weaker growth profile and recession.

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Recession, secession and political uncertainty: The post-Brexit UK

So, the opinion polls, which had shown a big move towards a Remain vote, got it wrong yet again, with Leave squeaking a win by 51.9% to 48.1%.

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It’s the stupid politics, stupid

For markets, which have seemingly largely priced out that probability over recent days, the market impact would be immediate if a Leave vote starts to look likely through during the early hours of Friday morning, including:

  • a precipitous drop in Sterling, with the euro also under pressure as the dollar, Yen and Swiss Franc benefit;
  • a hit to global equity markets and futures;
  • a flood of money into government bond markets, including Gilts and core euro area government bonds, but
  • a significant underperformance of euro area peripheral bonds; and
  • a hit to credit spreads, particularly of European financials and UK financials in particular.

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ECB Barrel Scraping Getting Louder?

There was never any doubt that the ECB would ease policy at today’s Governing Council meeting. In the event, however, it beat expectations, adjusting policy in several different ways:

  • Further rate cuts
  •  Increased asset purchases
  • More, and more innovative, long-term liquidity operations

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