Market analysis: Sentiment moves on from Brexit panic

The Leave vote which prevailed at the UK referendum left global financial markets in turmoil, but as the dust settles markets are now looking ahead to new developments that will steer them forward.

The governor of the Bank of England, Mark Carney, gives a press conference, his first since the leave result of the European Union referendum, at the Bank of England in the City of London, Britain ThuShow more

The Leave vote that prevailed at the UK referendum left global financial markets in turmoil but as the dust settles, markets are now looking ahead to new developments that will steer them forward.

As expected, the British pound was hit the hardest – dropping to more than 30-year lows against the US dollar and falling more than 10 per cent against the Japanese yen. The euro was also noticeably lower across the board – dropping below 1.11 against the dollar while global equity markets predictably sold off immediately following the news.

The safe haven asset classes, including the yen, gold and the dollar, all experienced large inflows and surged as a result of the growing risk-off sentiment in the immediate aftermath. The yen broke through 100 levels for the first time since 2013 while gold spiked to 27-month highs above US$1,350 an ounce.

As of Tuesday last week, market sentiment had started to reverse and equities surged. As the Brexit theme starts to fade, attention will shift to Bank of England policy. Its governor, Mark Carney, last week hinted at rate cuts for the UK economy and almost immediately the risk on sentiment came pouring back into global financial markets.

The US equity markets have almost fully recovered to pre-Brexit levels with the S&P consolidating above 2000 levels and the FTSE 100 turning in the best weekly performance since 2011, gaining more than 10 per cent in the past week to close above pre-Brexit levels. The pound remains under pressure – after finding support at 1.31 levels, GBP-USD has started consolidation and will find immediate resistance at 1.35 levels.

Markets will keep a close eye on Mr Carney who will present the central bank’s Financial Stability report on Tuesday. The expected dovish undertones from the Bank of England will continue to see the risk on sentiment prop up equity markets and will keep any pound gains in check.

Along with the Brexit vote this past month, we saw the Federal Reserve hold US rates while further solidifying their dovish mood towards future interest-rate increases, noting that “the pace of improvement of the labour market has slowed” and that “although the unemployment rate has declined, job gains have diminished”.

The Fed also dropped United States growth expectations to 2 per cent this year, down from a previous projected 2.2 per cent in March (and 2.4 per cent in December). Janet Yellen, the Federal Reserve’s chairwoman, warned in her press conference that a UK exit would have consequences to global financial markets and now that the move has materialised it all but negates any rate hike probability from the Fed this year.

The meeting minutes for last month, which will be released this week, will not account for the Brexit, but should address the issues closer to home – including a weaker US labour market. May’s US non-farm payrolls report was a disaster – only 38,000 jobs were added – and markets will turn their attention to June’s report due out on Friday. Expectations are for 180,000 jobs to be added. Any reading below this would reduce the likelihood of Fed action and as a result, would yield a weaker dollar with equities, commodities and major currencies appreciating against the greenback.

Amid all the market uncertainty and volatility expected as the markets turn to the US data docket, gold remains the safest play in the weeks ahead.

The Dubai Gold & Commodities Exchange (DGCX) benchmark gold contract has consolidated above $1,300 levels. The next upside target falls between the channel of $1,390-$1,430 while support comes in at $1,300.

Gaurav Kashyap is the head of futures at AxiTrader ME.

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