Markets after the Brexit vote

An update of where major markets ended the week following the UK vote to leave the European Union, as they affect New Zealand

25th Jun 16, 8:45am by David Chaston

Markets have closed in New York and London, so now is a good time to review how they ended the week in some key metrics for New Zealand.

Data is now updated in our daily currency and interest rate charts for the Friday close.

The headline changes are as follows:

The NZD is little changed on the day, ending at 71.3 USc, 95.3 AUc and 64.2 euro cents. The TWI-5 is now at 74.7.

These levels are similar to what we had over the past week, although they are about half a cent higher than where we ended last week.

Wholesale interest rates are a lot lower however.

In fact, from terms 4 to 10 years, they are at record lows. The 10yr swap is now just 2.66%

The two year swap fell -24 bps from Thursday and is now at 2.19%. (The record low is 2.16%.)

The rate curves has flattened. the 1-5 curve is now just +13 bps, the lowest since November 2008, and the 2-10 curve is just +47 bps, a level we were at only on June 17, seven days ago.

Risk premiums, as measured by credit default swap spreads, have jumped sharply in overnight trading.

~~We don't know the impact on Australasian CDS spreads yet and this will be updated here when they come through~~. But the US risk premium index for investment grade corporate debt jumped by about +14% at the market close, and by +26% for the European equivalent. The Australasian CDS spread index jumped almost +10% on Friday from the day before.

Commodity pricing saw a marked reaction also.

Gold jumped US$55/oz to US$1,316/oz. Silver rose modestly. Platinum jumped US$18 to US$984/oz

Copper and other industrial metals fell in price.

On Wall Street, the S&P500 closed down -3.6%, a similar fall to the Dow. The NASDAQ closed more than -4% lower.

Equities in London fell -3%, while in Germany they were down -6.8%. In France the fall was -8%.

	Friday January 1, 2016	Friday June 17, 2016	Friday June 24, 2016

NZD:USD	0.6829	0.7053	0.7126
TWI-5	73.55	73.77	74.71

2yr swap rate	2.85%	2.27%	2.19%
10yr swap rate	3.75%	2.76%	2.66%
2-10 swap curve	+90 bps	+49 bps	+47 bps

AU-NZ CDS index	126.7	115.4	119.0

Gold, US$/oz	$1,063	$1,262	$1,316

NZX50	6324	6847	6668
ASX200	5296	5163	5114
S&P500	2044	2071	2037
Shanghai composite	3539	2885	2854

Here is where the UK sits in the world economy, and some key metrics of how important it is to New Zealand.

	Data	data as at

World GDP	US$73.2 tln	2015
EU GDP as % of world	22.2%	2015
UK GDP as % of world	3.9%	2015
UK GPD as % of EU	17.6%	2015
Rank of UK GDP in World	#5	2015
Rank of UK GDP in EU	#2	2015

NZ exports to UK, NZ$ annual	$1.651 bln	Apr-16
of total NZ exports	3.4%
Rank	#5
NZ imports from UK, NZ$ annual	$1.400 bln	Apr-16
of total NZ imports	2.7%
Rank	#10

Visitors from UK, annual	213,000	May-16
of all visitors	6.5%
Rank	#3

Permanent migrants from UK, annual	3,942	May-16
of all migrants	5.8%
Rank	#4

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22 Comments

by Learn to Socia… | 25th Jun 16, 9:08am 1466802492

Donald Trumps speech and Q and A at Turnberry Golf Course in Scotland yesterday. He speaks about Brexit. It is sobering to listen to the man himself, and not having the media telling us what to think about him,.

https://www.youtube.com/watch?v=dzeF7b487uI

by bigblue | 25th Jun 16, 9:18am 1466803105

So now in very dangerous territory, central banks have lost control, monetary ploy has failed, global interest rates will continue to go down, gold will go higher, commodities will dive (watch out Fonterra), more monetary stimulus to come in Europe and USA and NZ stock market likely to see its biggest one day fall since the 1987 crash. Two years of tough times ahead.
Any feedback from Key or English yet?

by BadRobot | 25th Jun 16, 9:28am 1466803703

Meh - the NZ stock market dropped a couple of percent - repent the end of the world is nigh ( soon time to buy :-) ). I've seen so many dire predictions in the past few weeks - based on what I don't know.

by sharetrader | 25th Jun 16, 9:37am 1466804233

once the dust settles we could have another 2009 buying opportunity. interest rates will go negative and most countries will print.
its time NZ jumped onboard the printing train.

by BadRobot | 25th Jun 16, 9:56am 1466805395

I'm curious about the difference in the drops of the respective bourses - the US and UK down about 3% yet the French and German bourses were harder hit. Is this about the UK or more about Europe......

by sharetrader | 25th Jun 16, 9:38am 1466804291

its more about the EU

by Penguin | 25th Jun 16, 10:45am 1466808334

The top 10 consituents of the FTSE make up around 50% of the index. Over 70% of the earnings are from overseas so the profits will increase in sterling terms. The largest holdings include Glaxo,AstraZeneca, Royal Dutch Shell, BP, Unilever,Diageo,Vodafone and HSBC.
Europe indices hit more because financial sector makes up bigger percentage.

The NZ market was still open when it became clear BREXIT was a reality.

by Justice | 25th Jun 16, 11:34am 1466811242

My prediction. The knee jerk reactions of yesterday will be replaced by a far more rational realisation that regardless of this vote not a great deal will change immediately. Negotiations will take place on behalf of banks, traders, investors etc that will make the whole thing a non event in reality over the next few years.
The reason I say this is the power of vested interests will continue making things happen for THEIR benefit regardless. The people got their vote yes, but they will find it much much harder getting real change.

by Kakapo | 25th Jun 16, 12:15pm 1466813722

With you on this one. At the moment everyone's running around like their knickers are on fire, but really it'll be a long time before we've any idea of what the real long-term results will be, or what fishhooks may be lurking. I do think that for something this drastic the threshold should have been higher for a mandate to go ahead with the exit - perhaps a 65% majority in two referenda held a couple of years apart, or similar. With a 50% threshold and a result this close, there was going to be half the country being forced into something they really didn't want, whatever the outcome was, and that's not a good thing.

by J.C. | 25th Jun 16, 12:03pm 1466812983

Any of the debt monsters from the Anglosphere's currencies have been belted against JPY. You would have made more saving cash in yen over the past 2 years, despite what happened y'day. Some more extreme speculators are expecting another 25% appreciation in the yen. Depending on how this is played, it;s starting to look like Auckland house prices.

Should we expect to see capital flight from Japan? Hard to say but I doubt it as it would have already occurred.

by Stephen Hulme | 25th Jun 16, 12:16pm 1466813766

Hmmm..

It is rote mainstream recitation that low interest rates equal stimulus while high interest rates demonstrate the opposite to some degree of “tightness.” As Friedman pointed out, this is entirely backward as demonstrated conclusively by economic history:

Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy. Read more

by J.C. | 25th Jun 16, 4:30pm 1466829049

Yes, thanks for this it. I can't work it out, but I have some theories that Japan's influence as a carry trade origin and purchasers of U.S. debt has something to do with it. I can't sketch this out mechanically, but we see the same pattern emerge when the unexpected or turmoil happens.

by ngakonui gold | 25th Jun 16, 12:15pm 1466813745

I have shares in 4 companies on the NZX.
One dropped the others stayed where they began the day,and my investment in a forestry block just kept growing.
All the fuss seems to be artificially manufactured by those greedy buggers looking for a bargain..

by Stephen Hulme | 25th Jun 16, 1:01pm 1466816490

Bank shares got a pasting.

In the U.K., shares of Barclays PLC fell around 30% at one point Friday, although they later recovered somewhat. It and Royal Bank of Scotland Group closed the day down around 18%.

Among continental European bank stocks: Deutsche Bank AG fell around 14%, France’s BNP Paribas SA tumbled more than 17%, Spain’s Banco Santander SA dropped nearly 20% and Italy’s UniCredit plunged 23%. Read more

by sharetrader | 25th Jun 16, 8:57pm 1466845079

we only got a taster Friday, Monday will be down adain. it will be interesting to see how long before it settles.
you would expect some to benefit, George soros would have made a killing
http://www.dailymail.co.uk/news/article-3633745/George-Soros-trading-Re…

by Justice | 25th Jun 16, 2:56pm 1466823378

ASB Bank economist Nick Tuffley thinks this result will lift mortgage rates here. His opinion is on Stuff if anyone interested.

by MortgageBelt | 25th Jun 16, 3:20pm 1466824810

He hopes.
We've heard this threat before.

by Justice | 25th Jun 16, 5:38pm 1466833114

Yeap, they like to put fear in.

by sharetrader | 25th Jun 16, 8:59pm 1466845195

that would be due to all the banks losing equity , next stage is like the GFC where lending slows.

by MortgageBelt | 25th Jun 16, 8:44pm 1466844246

Stay in the Cash Funds.

by justanotherguy | 26th Jun 16, 11:53am 1466898827

A complete over-reacting in the forex markets. I have heard of people buying up during the low just after the referendum result, then making a killing on the rebound.

by linklater01 | 27th Jun 16, 9:31am 1466976710

I see a lot of posts saying that it's all a bit of a storm in a teacup and things will soon settle down. As an ex-pat Scot, I would like to think so, but sadly, I think they are being more than a little optimistic.
Both the main parties have serious problems and there is a real risk that the UK will break up. I am really concerned that many who voted to leave will rapidly become disillusioned when all the promises that have been made to them, fail to materialise. Immigration isn't suddenly going to stop and there isn't going to be a flood of money into public services. I hope I am wrong, but there could be real social unrest.
There is a great deal wrong with the EU, but the forces that are affecting so many people's standard of living are global; technology, globalisation, loss of bargaining power and an enormous increase in income inequality. Leaving the EU will fix none of these. I think that a very difficult few years lies ahead for the UK.