20160701-法国巴黎银行-UK_EXIT_VOTE_MARKET___ECONOMIC_IMPLICATIONS_22页_561kb

Summary of UK Exit Vote: Market & Economic Implications

Core Content

The document provides a comprehensive analysis of the economic and market implications following the UK's decision to leave the EU (Brexit), focusing on cross-asset outlooks including FX, rates, equities, credit, emerging markets, and gold. It outlines the short and long-term effects on global markets, with a particular emphasis on uncertainty, volatility, and central bank responses.

Main Points

Market Uncertainty and Volatility

• Uncertainty persists due to the political outcome and the unknowns of future negotiations with the EU.
• Realised volatility and volatility of volatility will increase, with a flight to quality expected, benefiting gold, core government bonds, USD, and JPY.
• Risk-off sentiment will continue, negatively impacting equities and credit CDS indices, especially for UK, eurozone peripherals, and Central and Eastern Europe (CEE) names.
• Negative impact on financials, including UK banks and peripheral banks, with rating agencies lowering their outlook for UK financial institutions.

FX Outlook

• GBP shorts increased significantly, with a net short exposure of -46 (from -36), and the bank expects GBPUSD to fall to 1.35 and EURGBP to 0.82 by the end of Q3.
• EURUSD is expected to fall to 1.09 in the near term, though markets are not overly concerned about contagion.
• USD is likely to appreciate against EUR, GBP, and commodity currencies in more risk-averse conditions.
• GBP volatility remains high, though it has declined from pre-referendum levels.

Rates Outlook

• UK interest rates are expected to fall further, with the BoE likely to cut rates by 50bp and restart quantitative easing (QE) with an additional GBP 100bn in asset purchases.
• EUR rates are expected to flatten and tighten spreads, with the ECB likely to extend the Asset Purchase Programme (APP) and possibly cut the repo rate by 10bp.
• US rates will face pressure due to slowing growth and accommodative central banks, with the Fed likely to hold off on rate hikes for at least 2016 and 2017.
• Japan is expected to ease further, with an 80bp cut in the policy-rate balance likely at the July BoJ meeting.
• Australia is expected to cut rates in August, with a 80% probability, and the curve is anticipated to steepen.

Equities Outlook

• FTSE 100 has bounced back to pre-vote levels, with high foreign revenue sectors and defensive sectors outperforming.
• Cyclical sectors with high domestic exposure underperformed.
• FTSE 100 dividends are expected to outperform the more domestically-exposed FTSE +250 index.
• Eurozone banks are seen as deceptively cheap, with low price-to-book ratios and expected returns.
• Equity volatility remains high, and investors may consider buying forward volatility to hedge against political risk.

Credit Outlook

• Credit indices reacted mildly to the Brexit vote, with synthetic indices showing a slight rebound.
• Short-term targets for MAIN and XO are 80 and 350, respectively.
• Long Credit via XO/Short Equity via SX5E is recommended for the next few weeks.
• UK banks are expected to remain volatile, while UK corporates with large international exposure are likely to outperform.
• US credit is viewed as a safe haven, despite potential volatility from elections.

Emerging Markets Outlook

• Emerging markets have returned to pre-referendum levels, with sovereign spreads tighter and currencies roughly unchanged.
• CEE currencies underperformed due to strong trade and financial links with the UK and EU.
• Brazil, Russia, and Indonesia are highlighted as the most attractive EM trades due to strong local stories and high yields.
• China's economic health is a critical risk factor for EM in the months ahead.
• Emerging markets' trade exposure to the UK and EU is detailed in the table, with varying degrees of dependency.

Gold Outlook

• Gold is supported by safe-haven demand, rising alongside the yen and US Treasuries post-Brexit.
• Downside risks to gold have decreased due to the Fed's likely restraint on rate hikes.
• Gold may rise further if uncertainty continues, with a potential target of USD 1,500/oz.
• Higher-rated sovereign debt and the dollar may compete with gold as a safe-haven asset, limiting further gains.

Key Information

• UK GDP is projected to be 2% lower than baseline by 2018, with a recession risk in late 2016-early 2017.
• Inflation is expected to overshoot, reaching close to 3% in late 2017/early 2018.
• S&P downgraded the UK to AA, and Moody's changed its outlook to negative.
• Sovereign credit spreads are widening, with the UK and peripherals leading the trend.
• Central banks are expected to maintain a dovish bias, with the ECB and BoE likely to increase liquidity and QE.
• GBP is expected to weaken, with negative impact on UK financials and peripheral risk premia.
• UK small caps are expected to outperform large caps due to the impact of weaker sterling on earnings.
• Financial conditions are tightening, with lower equities, a stronger dollar, and wider credit spreads.
• Emerging market divergence is expected to continue, with CEE currencies underperforming and others like Brazil rebounding.

Conclusion

The Brexit vote has triggered a prolonged period of uncertainty and volatility, with negative impacts on the UK and eurozone economies. The market is expected to favor safe-haven assets such as gold, USD, and JPY, while UK and peripheral financials face pressure. Emerging markets are expected to show mixed performance, with some regions like CEE struggling while others like Brazil and Russia performing well. Central banks are likely to respond with more accommodative policies to stabilize markets and support growth.