The Global Economy in June

Global markets were shocked on the 24th of June when the results of the UK’s referendum on its EU membership – dubbed ‘Brexit’ – saw a majority in favor of leaving the EU. The volatility and uncertainty that had persisted in the run up to the ‘Brexit’ vote spiked as markets around the world fell dramatically.

However, the market drop did not last long. Emerging and North American markets recovered their ‘Brexit’ losses in the weeks following the vote. This was aided by a number of other factors affecting investor sentiment. Investors favored Asian and Emerging markets as they were seen as being sheltered from the uncertainty affecting European markets, with Jakarta’s stock market leading the rise in South-East Asian stocks.

Europe is expected to remain mired in uncertainty, however, with no clarity on when – or even if – ‘Brexit’ would actually happen. Odds makers still show a significant chance for Britain being a part of the EU by 2020.

Uncertainty over ‘Brexit’ also played a part in the US Federal Reserve’s (Fed’s) decision to hold out on an interest rate hike in June. Analysts now put a greater possibility of a rate cut as opposed to the previously anticipated hike. This has also brought relief to emerging market companies that were expected to find it difficult to pay back $800 billion in maturing debt over the next few years.

In the Middle East, Saudi Arabia has taken steps to sell bonds to foreign investors for the first time. The decision was pressured by the increasing budget deficit created by low oil prices. Meanwhile, Nigeria decided to abandon the peg on the Naira and adopt a free float system, amidst an economic recession due to the oil price plunge. The currency depreciated immensely. But it was accepted by markets gleefully with stocks rising and bond yields falling.

Oil prices were volatile, rising above the $50 mark several times this month. The volatility was caused by fears of supply disruptions in Nigeria and Canada, amid some risk-off sentiment following the ‘Brexit’ vote. Oil traders expect the current price range to persist till the end of the year.

China continues to remain a major concern for markets with a large number of bad loans affecting the banking system in the country. Analysts predict a bailout of about US$ 500 billion might happen over the next two years to recapitalize the banks. It could drag down Chinese markets and the yuan, while increasing government borrowing costs and credit risk. Accordingly, many warn that investors should be warier of China’s economy than Britain’s.

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