Financial markets were hit hard by the Brexit vote, with equities and sterling falling heavily and cash moving into safe haven assets.
Investors, governments and central banks will be on edge to see how markets react today, after a weekend of focus on the political upheavals in the UK and pressure from the EU for Britain to move quickly to start negotiations. The key areas to watch are the following.
Currencies
Sterling is expected to remain under pressure. Since the markets closed on Friday, ratings agency Moody’s changed its outlook on UK debt to negative – meaning it may downgrade its rating – while Goldman Sachs slashed its 2017 UK growth forecast to just 0.2 per cent, close to recession.This all emphasises the economic hit to the UK and may keep sterling under pressure. Sterling closed around $1.36 on Friday, having regained some of its earlier losses, but still down over 8 per cent. Forecasts for its trading range in the weeks ahead range from $1.20 to $1.35 and moves will be driven as much by political as well as economic developments. It is also worth watching for euro weakness, due to fears about the impact on the euro zone economy. This could limit the damage a bit for Irish exporters to the UK, as sterling’s losses against the single currency might not be as much as against the US dollar and the Japanese yen. Some of these moves might spark central bank intervention.
Equities
Lower growth means less profits and so equities were hit on Friday,with the Iseq index of Irish shares down 7.7 per cent, driven by a massive fall in financial shares, off more than 20 per cent on average. While shares tumbled, there was no outright panic or the kind of liquidity shortages which hit markets in the 2008 crisis. A key issue this week is whether at some stage investors start to pick up stocks which have lost a lot of ground. Financial stocks are under significant pressure due to concerns about the impact of lower growth and low interest rates, both of which will hit earnings. If this continues it may mean that the Government has to abandon the 2017 part-privatisation of AIB, or plans to sell other bank assets. Britain has abandoned plans to sell Lloyds shares over the summer.
Losers
Some hedge funds reportedly made significant profits on Friday, but many – who had bet on a remain vote – will have lost heavily. As margin calls are made, some may have to go public with warnings to investors. This could unsettle the market.
Bonds
On Friday funds flowed into government bonds of major countries such as Germany, the US and UK: perceived safe havens. The yield on German 10-year-bonds moved back into negative territory, but cash moved out of the bonds of peripheral markets such as Italy and Spain. Irish bonds ended Friday only fractionally lower, but the Government and NTMA will be watching to see if selling pressures emerge. Some Dublin analysts fear there may be some selling, though the NTMA has no immediate need to raise new cash. Investors will also be watching to see if the ECB ups its bond buying to try to support markets under pressure.
