Macro Weekly
Group Economics
15 July 2016
Shrugging off Brexit, but… Nick Kounis Head Macro & Financial Markets Research Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
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Markets have been shrugging off worries about Brexit and other risks… …helped by more UK political stability, better global macro data… …and expectations of a central bank reflation wave However major challenges and risks remain… …negotiations between the UK and EU will likely be tough and long… …the UK is heading for recession, while the eurozone is slowing… …and Italian political and banking risks continue to loom
A more positive tone Over the last few days financial markets have generally been shrugging off any worries related to Brexit, European banks, politics more widely and global economic growth. For instance, the 5-day performance of equity markets around the world is a sea of green. Even the sterling exchange rate and high quality government bond yields have regained some traction. UK has more direction One of the factors behind this more constructive mood is that UK political uncertainty is ebbing, with a new government in place. Although the new Foreign Secretary Boris Johnson seems to have in the past insulted many world leaders, the UK has new Prime Minister – in Theresa May – much quicker than expected. As all other candidates dropped out of the process, the nine-week Conservative Party leadership election campaign was no longer necessary. A new cabinet, including a Secretary of State for Brexit, has been appointed. Macro data more encouraging In addition, global macro data has generally been encouraging. For instance, last week’s US labour market report was of the ‘not too hot not too cold’ variety. Employment growth seems to be holding up well enough to dispel any recession fears, while not being strong enough to suggest the Fed will hike any time soon. Similarly, China’s economy seems to be slowing at only a gradual pace, supported by the authorities’ stimulus measures. Indeed, China’s economic growth was stable at 6.7% in Q2. In addition, although investment spending continued to slow sharply in June, the growth rate of industrial production and retail sales edged up. Even the BoE’s decision to keep monetary policy on hold did not rock the boat too much. It was very clear from the MPC’s communication, that it wanted to wait for a full assessment of the outlook next month before easing policy. We expect the BoE
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