Britain’s vote to leave the European Union has increased uncertainty in the global economy and stock markets around the world plunged in the wake of Thursday’s referendum, while sterling’s value has also plummeted.
In the global debt markets, German 10-year bund yield ticked down to -0.17 percent, UK 10-year gilt yield tumbled to 0.944 percent and the US 10-year treasury yield fell to 1.470 percent (it is set to hit 4-year intraday low of 1.40 percent), Australia’s 10-year yield slid to 1.95 percent, UK’s 10-year yield fell to 0.93 percent, Japan's JGB yields all less than 0.1% for the first time (super-long 40-year JGB at 0.075%, 30-year JGB at 0.05%, 20-year at 0.04% and benchmark 10-year JGB at -0.0225%), New Zealand’s 10-year yield declined to 2.3 percent and South Korea’s 10-year touched 1.45 percent.
Fixed income securities were also supported by lower Fed funds futures. US Fed Funds futures discount a 9 percent chance of a 25 basis points rate hike by end-year and a 24 percent chance of a rate cut by the September FOMC meeting, according to Bloomberg calculations.
Moreover, the S&P announced that it has cut the UK’s sovereign credit rating to AA, from previous from AAA. According to S&P, the outcome of the UK’s EU referendum will lead to less predictable, stable, and effective policy framework in the UK.
The S&P, an American financial services company also added that they have reassessed their view of the UK's institutional assessment and now no longer consider it strength in their assessment of the rating.
“The yield on 10-year U.S. Treasury bonds may fall further, even lower yield still attractive to investors compared with negative rates in Japan or Germany, “said Bill Gross, manager of the Janus Global Unconstrained Bond Fund on Bloomberg.
“Could drive up the value of the dollar & increase the odds of a recession to the 30 percent to 50 percent range,” he added.
Lastly, UBS in its report said that the BOE will cut rates and FOMC to delay their hike and they are looking for twice 0.25 percent BOE cuts in August or October and Fed hike delay until December.
US Fed Chair Janet Yellen had mentioned during the June FOMC meeting that the UK exiting from EU might have enormous consequences for the outlook of the U.S. economy and financial market developments.
The Fed will be keeping a close watch on the incoming data in order to assess the effect of Brexit on the U.S. economy. The U.S. economy is expected to decelerate; however it will avoid a recession, said Danske Bank in a research report.
Moreover, the Fed is now likely to keep the rates unchanged at least for the remainder of this year. If required, the Fed is expected to lower rates back to 0.00 percent-0.25 percent and begin a new QE round.
The US Fed does not appear to prefer bringing rates to negative territory. At present, the markets are projecting a full rate hike by the Fed by the fourth quarter of 2017.
The material has been provided by InstaForex Company – www.instaforex.com