Clearly the result is a significant blow to economic confidence/’animal spirits’ in the short term and will put at least a temporary brake on growth in the UK and perhaps Europe. Bank share prices have also been hurt and their willingness to lend remains muted. European companies are therefore likely to remain relatively conservative — more about dividends and conservative balance sheets than share buybacks/mergers and acquisitions (M&As). This business cycle continues to struggle to gain traction in Europe due to the constant political crises.
We believe that the Bank of England is likely to cut rates to 0% from 0.5% currently. The Governor, Mark Carney, has said that he does not want to take rates negative. We expect further credit easing eg, resurrecting the Funding for Lending scheme if needed and more quantitative easing (QE), possibly. With yet another central bank heading towards zero percent interest rates, this continues to fuel the ‘global’ grasp for income yielding assets we have written about in recent months.
The issue at stake as of today is clearly ‘how’ the UK exits. There are soft and hard versions of exit, with soft (maintaining access to the free trade area) being the preferable version for the economy. Would the Europeans allow it? Currently, the Germans appear to be taking a softer tone than the French.
While Brexit alone is not sufficient to derail the current low default rate picture – the number of businesses defaulting on their credit lines - we have to proceed cautiously. Events could take a different turn next week with some very important data due in the US, such as non-farm payrolls, and the Institute of Supply Management (ISM) and other Purchasing Managers’ Indices (PMIs). Should the data be poor, given the very poor non-farm payroll for May (38K), markets may quickly start to worry about a global recession.