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Most risky bets are off

Published Monday, July 11th, 2016

The aftershock of the UK decision to leave the European Union was firmly felt last week and probably will have a decisive impact on trading in coming weeks. The message of the week was simple: risk off. This is why gold has gained 1.83% and the yen strengthened 1.93%. Lending money to governments also proved popular with the 10-year German yield falling to -0.184% on the week and the US-10 year Treasury note yield dropping by 22 basis points.

The biggest risk of the week was the sterling and the UK stock market. The former nosedived 2.32% bringing the total loss against the dollar since June 23 to 13%. The FTSE 250 index fell 1.75 % on the week and 6.7% since the referendum. As for sentiment in the UK the most significant development of the week was the halt in redemptions on several UK property funds. As of last Friday seven funds managing properties worth about £15 billion suspended trading. The imposition of restrictions on withdrawals is aimed at boosting cash flow but spooked markets as the UK property sector was the first to display genuine signs of financial stress in the wake of Brexit. Nevertheless the message is clear: trust in the backbone of the UK economy has been shaken. This pessimism has, so far, not convincingly spread over to other parts of the world but when or if it does the consequences will be painfully clear for any stock or commodity market bull.

Most European equity markets have also been negatively affected but not as much as the UK itself. The German DAX index finished the week 1.5% lower whilst there is no contagion expected in China where the Shanghai Composite Index actually gained 1.90% on the week. Meanwhile, Brexit has put Fed policy tightening on hold. US equities would have also ended the week lower had it not been for unexpectedly positive US job data on Friday which helped the DJIA finish 1.10% up and the S&P 500 index 1.28% stronger. According to the Labor Department, 287,000 jobs were added in June against expectations of a rise of 175,000 and represents a solid rebound from May’s weak jobs report.

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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.