June 29, 2016, 4:00pm EST
Yesterday we talked about the ECB’s projection on how the Brexit will impact on euro area GDP. And we looked at charts of Spanish and Italian sovereign debt. Both suggested that the market reaction, to the downside risk from Brexit, might be over-exaggerated.
Some markets have already fully recovered the Brexit-induced declines. But some key safe-haven assets continue to show healthy capital flows.
Let’s look at some charts.
Source: Reuters, Billionaire’s Portfolio
The chart above is a look at UK stocks. These are blue chip companies listed on the London Stock Exchange. You can see the 9% has been completely erased in just three trading days.
What about commodities? This is Goldman’s commodity index. It’s completed recovered declines, in large part to the reversal in oil and the continued surge in natural gas. Remember we talked about natural gas earlier in the month as it looks like it’s on a path to $4. It nearly hit $3 today.
Source: Reuters, Billionaire’s Portfolio
So we have some traditional “risk-on” assets sharply recovering losses.
But, the “risk-off” trade continues to hold in the traditional safe-haven assets. Bonds are being bought aggressively. You can see the U.S. 10-year yield is nearing levels of the peak of the European Debt Crisis, when Spain and Italy were on the precipice of blow-up.
Source: Reuters, Billionaire’s Portfolio
Interestingly, the 30-year yield is sliding too. This flattens the yield curve, which suggests bets on recession. But this extreme level is historically has been a bottom throughout the crisis period (2008-present).
Source: Reuters, Billionaire’s Portfolio
The dollar continues to hold post-Brexit gains — another sign of safe-haven flows.
Source: Reuters, Billionaire’s Portfolio
And next, the safe-haven flows continue to hold up in gold. But it’s not the runaway market gold bugs would hope for in a time of global stress.
Source: Reuters, Billionaire’s Portfolio
One could argue that the safe haven flows could be coming from core Europe, as Germany is most at risk in the Brexit for the ultimate bad outcome scenario (as we discussed yesterday, where the Brexit could create a spill over into European Monetary Union countries looking for the exit door). But as we reviewed yesterday, the sovereign debt markets in the vulnerable spots in Europe (Italy and Spain) aren’t giving that “bad outcome” signal.
Source: Reuters, Billionaire’s Portfolio
What about Japan? Japanese stocks have bounced sharply, but were among the worst hit given the sharp rise in the yen (a traditional safe-haven).
Source: Reuters, Billionaire’s Portfolio
And finally, U.S. stocks have come back aggressively, but haven’t fully recovered the decline.
Source: Reuters, Billionaire’s Portfolio
What do we make of it? If we consider that the biggest risk associated with Brexit is a destruction of global confidence, rising/recovering stocks go a long way toward defending against that risk. Since the central banks are in the business of defending stability and confidence in this environment, and they are clearly on patrol, they may have a little something to do with stock market recoveries (if not directly, than indirectly).
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