Julius Baer: sobre el BREXIT

Redacción - Jueves, 02 de Junio

• 
• 
• 
• 
• • 
  • 
  • 

Brexit: The UK’s giant leap into the unknown

 

• Political risks, which are set to last for months if not years to come, will keep volatility elevated. 

• The pound will continue to weaken, while growth will receive a blow from the second half of 2016 onwards. 

The aftermath of the United Kingdom’s surprising 51.9% ‘yes’ vote to the referendum on independence from the European Union has only just begun. While the initial shockwave of the outcome has rampaged across markets on Friday and continues to roll somewhat more mildly today, we must admit that the financial industry was clearly focusing too strongly on bookmakers’ odds and got caught wrong-footed. Beyond the turmoil, we dare to take a look at what stands ahead for the United Kingdom, with a grain of salt given the high level of uncertainties which currently exist.

As the market shock will eventually ebb away, the UK will have to overcome a prolonged period of political uncertainty and risks, which could last months if not years to come. Prime Minster Cameron’s retirement and succession, indicated to take place over the next three months, and a breaking test in the Tories’ majority government have to be overcome. While the vote has clearly divided the public, the pro-EU fraction in the parliament threatens to block the separation process going forward. Furthermore, break-up risks of the UK as such are rising with Scotland and Northern Ireland’s large dissent with the outcome eventually resulting in their own independence pledges. These political risks, which still lie ahead of the following tough and complex negotiations with the EU, will keep volatility elevated and markets sensitive to Brexit-related news flow for some time to come. 

For the pound sterling, we believe that weakness will extend gradually beyond the first shock reaction, as the fundamental data will continuously turn pound-negative. In this context, an expected breakdown of foreign direct investments will expose the UK’s large current account deficit to the attention of FX markets. Furthermore, Bank of England rate hikes next year have been definitely wiped off the table, eliminating support from interest rates. Negative sentiment and risk-discount need no further explanation. We hence revised our bearish EUR/GBP forecast to 0.93 over a 3-month horizon and would not be surprised to see a dip to parity within the next 12 months. The cable forecasts are GBP/USD 1.18 for 3 months and 1.12 for 12 months, respectively.

In terms of economic forecasts, uncertainty will freeze investments and hiring, resulting in a wipe-out of economic growth in the second half of 2016. As the first two quarters of 2016 are already home and dry, the drag is fully visible only in the 2017 forecast with 0.7% average growth, down from a previous 1.7%. For inflation, collapsing growth will contain the currencies’ inflationary effect and we expect the consumer price index to rise not faster than 1.7% next year – enough room for the Bank of England to manoeuvre without risking inflation to overshoot. 

 

David A. Meier, Economist, Julius Baer

 

*

 

Brexit: Outcome for “safe haven” currencies and Switzerland

 

• Of the three “safe haven” currencies US dollar (USD), Japanese yen (JPY) and Swiss franc (CHF), we prefer the USD. 

• Brexit puts not only the Swiss National Bank (SNB) but also Switzerland’s government under a squeeze, with all bilateral trade agreements between Switzerland and the EU at risk.

 

Last Friday, the surprising Brexit vote triggered, as expected, hefty moves away from the British pound and let “safe haven” currencies like the USD, JPY and CHF surge. Now the dust is settling, what does this mean for our outlook of these currencies? Of these three “safe haven” currencies, we prefer the USD in the quarters ahead, even though the JPY showed in relative terms the largest strength last Friday, when the Brexit shock occurred. With the British pound, the euro also came under pressure. We believe this will last against the US dollar: Therefore, we reduce our 3-month EUR/USD forecast to 1.10 from 1.15 and 12-month horizon to 1.12 from 1.15. The US dollar is well positioned to profit also against the Japanese yen in the coming months, but not as pronounced as previously forecasted. Therefore, we lower our USD/JPY forecast to 106 from 109 and leave our forecast unchanged at 110 for a 12-month horizon. Weak cyclical momentum and the recent yen surge will likely push the Bank of Japan into further action going forward. The Swiss franc, on the other hand, was kept so far relatively steady to the euro, its most relevant reference currency, through hefty intervention by the SNB. With this in mind, we reduce our 3-month EUR/CHF forecast to 1.09 from 1.10 and leave our 12-month forecast unchanged at 1.10. Apart from keeping the SNB under pressure, Brexit is putting Switzerland’s government under a squeeze too. The renegotiation of free mobility of EU citizens in Switzerland is set to find a deaf ear in Brussels and to miss domestic deadlines. Any unilateral implementation of the constitutional mandate to cap this EU mobility will put all bilateral trade agreements between Switzerland and the EU at risk. While the SNB is determined not to give in, such a policy stance in the case of the Swiss government could backfire and make the SNB’s task even more difficult.

 

Janwillem Acket, Chief Economist, Julius Baer

 

 

*

 

Brexit: Impact on UK and European banks

 

• The Brexit vote has put short-term uncertainties on the economic growth prospects of the UK which will affect UK banks. 

• European banks will be mainly hit via a lower net interest margin as a result of probably lower rates for longer. 

 

The Brexit vote has put short-term uncertainties on the economic growth prospects of the UK. Over the near term, we believe weak-ening currency, rising unemployment and slowing economic growth could result in asset quality deterioration. In addition, higher funding costs, loan growth and weak real-estate sector could weaken UK banks. 

The UK public decision to leave the European Union did not catch UK banks off guard. The macroeconomic effects of this decision for the UK were already tested in the last stress test in the ad-verse scenario and missing capital was raised in the meantime.

For European banks in general, Brexit will have certain implications because of their high correlation to the interest rate level. If we assume low rates for longer, European banks will be hit by pressurised net interest rate margins. Most hit will be the peripheral banks. Another area to track is the legal uncertainty following the Brexit for banks. On the one hand, 5,000 UK firms are allowed via passporting to provide financial services to EU member states. Consequently this passport will be lost as a consequence of the Brexit. On the other hand, we have a significant amount of banks such as big US or other European investment banks performing their operations out of London. As a result of the Brexit, these banks will rethink their strategy.

 

Christian Dubs, Fixed Income Analyst, Julius Baer

 

*

 

Commodities: Limited impact of Brexit

 

• The impact of a Brexit on commodities should be limited to a strengthening US dollar and deteriorating market sentiment. 

• Unless wider economic and financial market consequences materialise from the Brexit, high gold prices are unlikely to last.

 

The Brexit vote shook financial markets on Friday, but commodities as an asset class did not move much. Commodity indices fell between 2% and 3% on the back of a stronger US dollar. Within the asset class, losses in crude oil and industrial metals were offset by gains in precious metals. That said, the impact of a Brexit on commodity markets should be generally limited. It should primarily be related to a strengthening US dollar and deteriorating market sentiment rather than fundamentals. A case in point is crude oil, which lost around 5% on Friday despite the fact that a Brexit would hardly shift supply and demand balances. As we have been arguing before, the recent rally in crude oil was driven by improving market sentiment rather than improving fundamentals. The market remains well supplied as Middle Eastern exports are growing while US shale is coming back to life. 

 

The only market where we do see a fundamental impact is of course gold. Brexit-related uncertainties should remain a supportive element for forward. Gold should continue trading with market sentiment, i.e. benefit from rising risk aversion and suffering from falling risk aversion. In the short term, prices could rise towards USD 1,400 per ounce. Unless wider economic and financial market consequences materialise, e.g. renewed fears of a eurozone breakup, we maintain the view that high prices are unlikely to last. History has shown that political events usually do not have a lasting impact on gold but cause short-term deviations from longer-term trends.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

 

 

[Volver]