Brexit Tests Investors’ Nerves

Brexit Tests Investors’ Nerves

Stocks recently experienced a five-day retreat, with the S&P 500 seeing its steepest drop since February 11th.

Those losses have been driven primarily by concerns over the Brexit vote on June 23rd, when voters in the U.K. will decide whether that country will remain a member of the European Union. Speculation that the U.K. will leave the EU—and concerns about the impact that move would have on global financial markets—have ramped up anxiety among investors and central bankers alike. As such, global central banks sounded the alarm over the risks of Brexit—with Federal Reserve Chair Janet Yellen admitting that the Brexit vote factored into the Fed’s decision last Wednesday to hold interest rates steady for the time being. Later in the week, other central banks opted to maintain their existing monetary policies.

chicago_board_volatiloty_06172016Stock market losses were compounded by sharp declines in crude oil prices, which occurred as the prospect of a global disruption in the supply of oil dissipated. As one example, output in Canada is expected to ramp up after wildfires cut production during the past month.

In the fixed income markets, the yield on the 10-year U.S. Treasury note fell to its lowest level since 2012, as global uncertainty over the Brexit vote and its potential impact on worldwide economic growth prompted investors to flock to “safe haven” assets such as government bonds. In the wake of these conditions, expectations that the Fed will raise interest rates anytime soon have fallen to low levels. Just 4 percent of bond traders currently expect the Fed to raise rates at its July meeting, while fewer than half (40 percent) see a rate hike occurring as far out as February 2017.

Volatility on the rise

chicago_board_volatiloty_06172016Global volatility and asset correlations have risen over the past week, fueled by the uncertainty over the Brexit vote. The CBOE Volatility Index, a key benchmark for gauging anticipated market volatility, rose above 22 last week—up from around 16 the previous week and 14 in early June. This development and our analysis suggest that significant short-term price swings in the equity markets may be coming. In Horizon’s growth-oriented portfolios, we continue to favor U.S. assets relative to foreign assets, due to the stronger risk-adjusted characteristics of domestic assets.


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