Second Quarter 2016: British Voters Discover Secret to Losing Pounds Quickly
British voters’ surprise “leave” vote stole the headlines in the second quarter of 2016. The late-June vote, although non-binding, sets the UK on a multi-year path toward its eventual removal from the 28-nation bloc. British Prime Minister David Cameron promised resignation before fall but a considerable cloud of uncertainty hangs over who will lead the UK through a lengthy and complex negotiating process. Similar uncertainty surrounds the rest of Europe. How will the renegotiation of trade terms with one of the region’s largest economies and trading partners affect those partners? Does the UK vote pave the way for other countries to follow suit? Will a second UK referendum reverse the Brexit course?
World markets reacted strongly on the surprise vote. The (UK) FTSE 100 Index appreciated in the week before the vote, anticipating the opposite outcome, and then fell for two days before recovering to a 10-month high by quarter end. The US and other world markets reacted similarly as the S&P 500 finished the quarter up almost 2.5%. The British pound, however, fell more than 10% versus the dollar following the vote, to its lowest level in 35 years. British stocks priced in US dollars suffered similarly.
The increased volatility benefited fixed income as yields declined in a flight to safety. Long-dated Treasurys posted the strongest gains. The Federal Reserve, against the backdrop of possible Brexit and slowing US job growth, declined to raise interest rates during both meetings during the quarter, and the market dampened expectations for the timing and pace of future rate hikes.
Commodities rose during the quarter, with oil returning to $50 dollars a barrel. Commodity gains helped emerging market debt as well as domestic high yield sectors post strong gains for the quarter.