Market Commentary | Brexit Fears Return

Tuesday saw Brexit-driven fear making a vehement return to global markets. Most global bourses were heavily in the red (London was, quite strangely, an exception as it ended the day slightly higher) and UK, US and German 10-year yields continued to march lower and set new records at approximately 0.77%, 1.37% and -0.18% respectively. Oil prices were down more than 4% as prospects of the latest potential economic slowdown weighed on investor’s minds.

M&G, who manages the UK’s largest commercial property fund, said on Tuesday it had suspended redemptions in its £4.4 billion Property Portfolio, following similar moves by Standard Life and Aviva earlier this week. The fund manager said “Redemptions have now reached a point where M&G believes it can best protect the interests of the funds’ shareholders by seeking a temporary suspension in trading”.

The news put renewed pressure on both the financial services and the property sector in the UK. Stock like Legal & General, Prudential, Aberdeen Asset Management, Lloyds Baking Group were nursing heavy losses as were homebuilders Berkeley Group and Barratt Development, which fell more than 8% on the day.

The British currency also took a hit, plunging below $1.30 in intraday trading and hitting a 31-year low against the US dollar. The Euro rose to 0.85 against the pound – a level last seen in October 2013. The pound also fell on the back of comments by Bank of England Governor Mark Carney, who warned that Brexit risks are starting to “crystallise”, and announced the relaxing of certain banking requirements in a bid to boost lending. In a briefing after the publication of its bi-annual Financial Stability Report, Carney said “the number of vulnerable households could increase due to a tougher economic outlook”.

The fallout from Brexit is causing a major re-think in terms of the direction of future monetary policy in the UK. Before the referendum, the UK was seen as the only country likely to follow in the US’ steps and hike its interest rates in the medium-term. With the heightened uncertainty after the vote markets are now starting to price in an interest rate cut, and potentially go down the road of asset purchases. The Monetary Policy Committee is due make an announcement next week after its latest scheduled meeting.

Meanwhile, in non-Brexit news…

Chevron has given the green light for a $37 billion expansion of the Tengiz oilfield in Kazakhstan. This is the largest development to be approved since 2014. The expansion should add around 260,000 barrels of crude oil per day, starting in 2022. The expansion bucks the latest trend which has seen oil companies greatly cut back on capital spending and developments.

The filed is run by the TCO Consortium, which is 50% owned by Chevron. ExxonMobil owns 25%, Kazakhstan’s state oil company owns 20% and the remaining 5% is in the hands of Russian oil company Lukoil.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.