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Brexit is the Zika of the financial markets

Published Thursday, July 7th, 2016

According to the Merriam-Webster dictionary, contagion is the transmission of a disease by direct or indirect contact. The patient, sterling, fell seriously ill in the early hours of June 24. The initial diagnosis was not thorough enough and it had not been admitted to hospital immediately due to this misdiagnosis let alone transferred to isolation unit. It has been losing weight ever since. Before the illness struck it measured 1.4878 now it is only 1.2961, 13% less than two weeks ago. Now it weighs less than in 1992 during the Soros-epidemic or in 2008-2009 when the Lehman-plague struck.

As the state of the patient had been overlooked at the beginning, this gives rise to the question: has anyone else, family, friends or acquaintances, been infected and are the drugs recently administered in the form of reducing the capital requirements of UK banks working? Initial signs are not encouraging. Stock markets tried to recover from the close contact with the patient and seemingly managed to do so last week. However, the symptoms have resurfaced this week after major UK property funds halted redemptions. They put on a brave face by saying that only open-ended funds are involved but this cannot disguise the fact that investors are worried hence the growing intention to withdraw funds from one of the most important sectors of the UK economy.

The most indicative stock index of the UK’s economy is the FTSE 250 index which has fallen almost 10% from the pre-referendum level. The FTSEurofirst 300 index is down 7% and the S&P 500 Index has lost 0.7% during the same period. This weakness can obviously be taken as a sign of contagion although it has to be stated with a certain amount of optimism that more distant relatives are looking healthier: the FTSE 100 index is 2% higher from the June 23 level, the Shanghai Composite Index have risen 4.5% over the last two weeks. It seems that those closest to the ill are more affected but this is not to say that others will not catch the disease in the future.

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Posted by Tamas Varga

Tamas Varga has been in the oil industry since 1992 and with PVM for 18 years. During his time in the industry he has gathered a range of experience in the oil markets. At PVM Tamas is in charge of data collection and analysis.