In the wake of Brexit, many stock indices around the world have slumped, and 20 of the world’s biggest banks have shed a quarter of their combined value since the beginning of the year.
The Dow Jones average has just about recovered from all its Brexit losses, but some individual shares are still down following bad news in the oil industry.
Oil prices, which were making a slow recovery prior to Brexit, have stalled, and U.S. crude oil was at just over $45 a barrel as of July 7, a two-month low.
Gold, which has climbed in the midst of political uncertainty since Brexit, hit a two-year high of $1364.90 per ounce the previous day. Silver also has risen in the wake of Brexit, with prices up 17 percent versus eight percent for gold.
At the Financial Times, U.S. Economics Editor Sam Fleming expects that Brexit will ultimately not affect the U.S. economy much, given that U.K. business accounts for less than four percent of the global GDP. Fleming claims that even if U.S. exports to the U.K. fell by 10 percent, U.S. growth would suffer less than a tenth of one percent.
Service sector numbers for the U.S. economy were positive in June, leading many analysts to believe that despite international turmoil, the fundamentals of U.S. markets remain strong.
“The U.S. economy, while slow, remains vibrant,” declared Jonathan Golub, the head U.S. market strategist at RBC Capital Markets. At the same time, he said, “it doesn’t mean we’re off to the races.”
The June meeting of the Federal Reserve revealed a split in the opinions of its officials about the economy’s health and the future of interest rates. The value of the U.S. dollar was down as the consensus was that the bank would wait for new employment and inflation numbers before making a decision on interest rates.
Many are hoping that May’s jobs report, which was the U.S.’s weakest since 2010, was an aberration. Overseas, Japanese and British bond yields fell to record lows in anticipation of June’s jobs report, due shortly.
Globally, a bright spot in the economy has been the U.K. FTSE 100 index, which has climbed since Brexit. However, much of this gain has been due to a fall in the value of the British pound, now trading at less than $1.30, its lowest value in 31 years.
As continued political upheaval takes place in Great Britain and the EU, this value may fall further, and stocks in the FTSE indexes may continue to rise, buoyed by the weak price of sterling.
Exposure to losses in British real estate has some insiders concerned about the European financial sector. In Italy, the national government wants to spend up to $45 billion to shore up banks laden with debt from bad loans, in a measure similar to the U.S. government’s TARP plan of 2008.
Some Italian bank shares are down as much as 80 percent, and Italian leaders have indicated they may need to turn to help from the EU.
A public argument between German Chancellor Angela Merkel and Italian Prime Minister Matteo Renzi hasn’t helped the situation, but a potential one-time bailout for the financial institutions may help the EU avoid suffering from further post-Brexit malaise.
In China, the yuan remains at some of its weakest levels in six years, and the Japanese yen has gained in value due to post-Brexit market distress. Japanese 20-year bond yields have turned negative, and the Japanese Nikkei index has been down on the stronger yen.
The political situation in Australia is clarifying as Prime Minister Malcolm Turnbull believes he can form a majority for his coalition of conservatives, despite Standard & Poor’s downgrading of the country’s Triple-A rating outlook to negative.
Christine Lagarde, the chief of the International Monetary Fund, has warned about a possible global recession due to Brexit and rejection of free trade by the next U.S. president.
A number of Wall Street analysts have said that the type of protectionist measures advocated by Republican candidate Donald Trump have an ill portent for the U.S. economy.
Slim growth in wages and productivity, despite increases in the number of jobs and lower unemployment spell trouble for consumer confidence and spending. That, in turn, increases the chances of a recession and is a harbinger of bad tidings for incumbent politicians in the Fall.
Regards,
Ethan Warrick
Editor
Wealth Authority
