Brexit: no sign of panic - July 17, 2016

Brexit: no sign of panic

On Monday, the rather important S&P500 index hit a new record high at 2137 point, so the panic that came after the Brexit referendum seems to have vanished. There are several local and global reasons that may have led to this, and we can expect a future of slow growth.

file

S&P500 weekly chart
While S&P performs great, European indices are still under the before Brexit level. Probably the reason behind this is that the tighter European integration and structural reforms are still in question. However, after the Brexit, the European leaders seem to be even more EU supportive, as The Guardian reported.

It’s also interesting to see that the British FTSE-100 index is 4-5% higher than it was before the historical referendum. A good reason for this might be that the sharp fall of GBP helps British multinational companies a lot on the revenue side.

The record of the S&P500 can also mean that the money waiting to be invested might start to flow back to stock exchanges, pushing the prices even higher. The record low bond yields may be an important factor in this. Globally, there is now $11.5 trillion worth of bonds in negative yield territory which practically means that investors are paying the states for keeping their money safe. The global growth remained lower than expected in the last years and there’s fear on the market for several reasons: Chinese economy, Brexit, Italian bank crisis, US presidential election, migrant crisis, etc. All these lead to a fear of recession.

In the meanwhile, federal banks are rather soft: they are not tightening monetary conditions and FED always backs out from its tougher statements. It’s still obvious that there’s a growing bubble on the bonds market.

What does all this mean? The European and the US economy is slowly growing due to the low bond yields, the rising domestic spending and the reviving loan growth. As riskless bank deposits and bonds still don’t grant any return, the investors have to keep buying other instruments like stocks, real estates, precious metals and so on. Therefore, if there’s no unexpected and unforeseen shock in the global economy, the stock exchanges may grind higher in the next months. This is what federal banks aim as well: good stock exchange performance leads to growing wealth and better comfort, and people may spend more. Wages are also growing slowly (accompanied by a minor inflation) and that could help spending, therefore help the economy.