Market review: All eyes were on Brexit

Good morning,

As you may be aware, Britain voted to leave the European Union - the market reaction was immediate with sharp falls across risk assets on Friday.

The FTSE 100 closed 3.15% lower, even though 27 stocks ended the day in positive territory (mainly companies with a high percentage of overseas earnings). The FTSE 250, which comprises mostly domestically focused businesses, dropped 7.2%, its biggest daily fall since Black Monday in 1987. Sterling fell 8% against the US dollar and 6% against the Euro.

Credit agency Moody’s cut the UK’s outlook from stable to negative on concerns of weaker economic growth. UK government bond yields hit a record low with 10-year yields down more than 30 basis points to 1.018%.

US and European markets, also, suffered significant falls, with the S&P 500 closing 3.6% lower, its worst day for 10 months, whilst the German DAX fell by 6.82%.

'From an economic point of view, we can expect lower growth in the UK and across Europe, and that is now being discounted in equity markets. We expect a mild recession in the UK over the course of this year.

Today’s result will, also, set off a domino effect of political risk. Whether it’s the US election later this year or the French election next year, investors are going to be far more cautious. Dominic Rossi – Global CIO, Equities.

Away from the UK, Janet Yellen appeared before Congress last week. In her prepared remarks, she said that a cautious monetary policy approach remains appropriate. Ms Yellen described recent economic developments as mixed with consumer spending a strength but business investment a weakness.

Separately, the International Monetary Fund cut its US growth forecast for 2016 to 2.2% (from 2.4%) – it, also, said that one in seven people in the US were living in poverty and recommended raising the minimum wage.

May existing home sales in the US climbed 1.8% to an annualised rate of 5.53 million — the best since February 2007. The median house price rose 4.7% from a year ago to a record $239,700.

In other news;

• Raghuram Rajan, the governor of India's central bank, will step down in September at the end of his term after ‘due reflection and consultation with the government’
• India announced a radical overhaul of its foreign ownership rules to attract more overseas investment ‘with the objective of providing a major impetus to employment’
• The National Bank of Abu Dhabi and FGB confirmed merger talks which, if concluded, would create one of the largest banks in the Middle East with assets of around $171 billion

The UK decision to leave the European Union is a reminder that financial markets can be subject to periods of event-related volatility during which investor confidence can be significantly undermined.

(source: Fidelity)