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The UK referendum took the global markets on a sickening roller – coaster ride during the week past, especially on the final day, when the final result came out. The unexpected decision by Britons to break away from the EU – a project that took 50 years to bring to its current standing, spiked volatility in stock markets, currencies, commodities and bonds to historic levels, with many markets hitting levels not seen in decades. These developments now pose a significant threat of causing a global economic crisis, should the separation process turn out to be complex and uncertain.
The British pound lost its steam, crashing to a record low of 1.32217 against the greenback, 11% lower from its previous close on Thursday, and hitting levels last seen over three decades ago. UK’s FTSE 100 index also witnessed a sharp decline opening Friday’s trading session with a big gap down. Both markets have recovered some of their lost ground, but the coming days and months may see significant blows to British markets as the overall cost of leaving for the British economy becomes clearer.
Wall Street suffered its largest selloff in the last 10 months on friday as the setback from the results of the UK referendum raised concerns on the future of the UK-US-EU relationship on political, economic and strategic levels, as well as concerns about the fate of US investments into UK and EU, given the potential for changes in regulatory processes and laws. The US S&P 500 index lost all its gains for the year to date, tumbling by 5% compared with the last settlement at 2111.98.
Due to rising turmoil in global financial markets, investors tried to rush into safe-haven assets like the Japanese yen and precious metals, causing prices to soar steeply. The yen hit the highest level since July 2014 versus the greenback, falling below the key 100.00 benchmark for a brief period during the early part of the trading session, to end at 102.215 when the trading session on Friday ended. Gold also broke its record high in over two years, hitting a peak of $1358.24/oz.
The greenback jumped the most since the global financial crisis in 2008. The dollar index DXY marked a Friday high at 96.66, in comparison with the previous close of 93.31. A strong dollar combined with the risk of a global recession triggered by the Brexit, contributed to falling oil prices, along with a smaller-than-expected draw-down in US crude stockpiles. West Texas Immediate crude on June 24 closed at $47.77/barrel, down 2.3% for the week. Markets are pricing that the three-month-long recovery in oil prices is about to be derailed.
After Britain made the momentous decision to leave the EU, David Cameron, The UK Prime Minister, announced that he would resign by the start of the Conservative party conference in October with the hope that his successor would steer this country to its next destination. Meanwhile, shocked by the terrible change of global scenarios, many Britons realized that they had had no idea on what they may have voted for. Millions signed a petition requesting the Parliament to organise a second referendum, indicating the divisive nature of the vote and the deep divisions within the UK. In the meanwhile, EU officials immediately called for Britain to begin negotiating its exit from the bloc, ready to trigger the Article 50.
Complicating this situation further is the developing situation in Scotland which voted comprehensively in favour of staying within the EU and political voices in the country have indicated that Scotland voted to stay within the UK in the Scottish referendum of 2014, based on the contingency of the UK continuing to remain a part of the UK. The Scottish First Minister Nicola Sturgeon has already indicated a developing desire to hold a second referendum on Scotland’s continued membership of the United Kingdom, as it strongly leans towards remaining a part of the EU, within or outside the UK.
Ending the turbulent week, markets recovered slightly after the unexpected shock. Though, many consequences may become more manifest in the long-term and the markets may return to some form of stability, suitable measures are required by governments and central banks to ensure that markets do not become a mirror image of the 2008 Sub Prime crisis.
Earlier in the past week, the Reserve Bank of Australia released its minutes on the June meeting, with detailed insights into the economic conditions. The central bank observed that GDP growth in the first quarter in 2016 had been stronger than expected, due to low interest rates and the depreciation in the exchange rate since 2013. The minuted further indicated the expectation that current monetary policy would be consistent with sustainable growth in the Australian economy and inflation returning to the target of 2%.
FED President Yellen, in her two-day testimony on June 21-22, expressed an optimistic stance on US economic prospects, expecting that the US labor market may recover soon. The Chairwoman mentioned no clear timing of another interest rate hike, saying that the central bank still kept a close eye on global market volatility. She is scheduled to talk at an event in Portugal, on Wednesday(in the coming week) and investors are awaiting any potential comments on the historic “Brexit” and how it may impact the global economy. US interest rates are currently being prices to stay between 0.25% and 0.5% by the December meeting.
The final Gross Domestic Product reading in the US for the first quarter in this year will be out on Tuesday. It is expected to come in at a slower pace of 1.0% – burdened by the slowdown in the global market. The US economy had registered a growth rate of 1.4% in the last quarter of 2015.
Late on Thursday, the China Federation of Logistics and Purchasing (CFLP) will release it PMI data for June, with economists’ forecasting an expansion in the manufacturing sector. The manufacturing PMI is expected to come in at the average point, down marginally from the previous reading of 50.1 in May.