The US Treasuries complex strengthened Monday on unexpected Brexit vote and it is set to hit 4-year intraday low of 1.40 percent. Also, the probability that the Federal Reserve will tighten this year has tumbled to 15 percent, from 76 percent, which boosted demand for fixed income securities.
The yield on the benchmark 10-year Treasury note fell more than 10 basis points to 1.470 percent and the yield on short-term 2-year note dipped 8 basis points to 0.574 percent by 12:30 GMT.
Considering the reverberations of this shock beyond the UK, in terms of global markets and eventually the world economy, along with safe-haven flows due to the associated uncertainty, Treasury demand should be robust. Moreover, expectations of the Fed raising rates for the foreseeable future have understandably gone out the window.
On Friday, just over 72 percent of the UK population, the highest participation rate in a country-wide poll since 1992 have participated in a historic referendum to abandon the EU project for good, highly legitimising the 51.9 percent vs 48.1 percent in favour of leaving, result. This outcome flies in the face of the high implied probabilities, based on bookie’s betting odds, of staying in, is at odds with several of the final (pre-referendum) opinion poll findings, and indeed goes against the grain of the number of self-confessed EU-sceptics who are said to have reluctantly moved towards the ‘Stay’ camp.
Although the UK physical departure from the EU will not occur for at least a few years – article 50 of the Lisbon Treaty must first be invoked – domestically, the UK faces a very uncertain l-t economic future, and a sea-change in the political landscape. PM Cameron is to step down within three months and is likely to take along with him, Chancellor Osborne. The face of the next Conservative ‘administration’ that will be responsible for negotiating the country’s divorce and orderly exit terms from the EU will be altered, as the centre of gravity of the Tory government moves decisively further to the right.
Moreover, we foresee that the UK’s relationship with ex-EU partners will be significantly altered. Beyond that, in view of Scotland’s 62 percent vote in favour of remaining in the EU, the SNP will offer another referendum on independence to Scotland, on the basis of Scotland having been yanked out of the EU against the will of its people. We see next time around the Scottish people will likely vote in favour of secession.
Although domestic economic indicators are taking a back seat for now, Monday brings the US preliminary Markit Services PMI. The highlight of the coming week's data will be the ISM Manufacturing survey on Friday.
Meanwhile, the S&P 500 Futures down 14 points to 2,004.50 by 12:30 GMT.
The material has been provided by InstaForex Company – www.instaforex.com