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Market has unexpectedly settled since ‘Brexit’ vote

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Global markets have settled down considerably since the Brexit vote last Friday. The relationship between stocks and bonds that succeeded the vote has completely changed in the past 24 hours. The vote caused a “flight to safety”, which is when investors sell equities (stocks) and exit appropriately called “Risk On” trades, then buy bond and mortgage back securities because they are lower risk investment vehicles. Today, investors  who are buying equities and oil ended the day with a 4.2 percent increase (due to the U.S. Government announcing a larger than expected reduction in crude inventories).

The central banks take notice when equity prices collapse, like they have in the past several days, and are already discussing how to provide additional economic stimulus to ease the market’s fears. That will most likely come in the form of providing cheap financing to European and British banks, (ensuring there isn’t a continued runoff in asset prices). In the U.S., it’s likely that the Federal Reserve won’t be able to continue with further rate hikes until 2018 or so.

With cheap funding for the foreseeable future and a Fed backstop likely on the table, equities have regained most of their post-Brexit losses. Bond prices aren’t suffering either, likely because the central banks will also beef up bond purchases (with rumors that they will also include corporate bonds now). There isn’t much data on the horizon before next Friday’s Employment Report, but the importance of that report has been marginalized by the situation in the European Union. Mortgages & treasury rates are unchanged with today’s news giving the market some stabilization.

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