Consequences for Markets

The market implications of the vote still seem quite unsettled at the time of writing. After sharp falls in sterling against perceived safe havens of the Japanese yen, Swiss franc and the US dollar, it has regained some traction after news of coordinated central bank support. The UK equity market is also stabilising at lower levels, with European assets falling with a sense of contagion. Fixed income markets have performed reassuringly well, pricing in roughly a 50% probability of a cut in UK interest rates alongside a fall in expected levels of inflation, presumably as a result of a slowing economy. The prospect of increased centrifugal forces on the broader European union has also accentuated the differences in European economies with core European yields falling and the funding costs for peripheral countries rising.

We can expect that the current market response will not be the final one as the interdependencies of regions and assets play out, but the immediate response is that investors believe the vote has introduced more uncertainty into financial markets.