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JP Morgan Market Bulletin: Brexit - a Shock for Markets, or a Crisis?

Posted by WrapManager's Investment Policy Committee
June 28, 2016

Excerpt from the June 24, 2016 JP Morgan Market Bulletin. Click here to read the entire bulletin.

"Investors have been seriously wrong-footed by the result of the EU referendum. But the shock of City traders this morning is nothing compared with the stunned response of the people who thought they ran the country. The economic and political questions raised by this vote will not be answered for years, possibly decades. But the immediate questions for investors are how long the "risk-off" mood in markets will continue and how much damage it will do in the process.

Our first assessment is that this is a large shock but, ultimately, a local one.

The UK economy will slow sharply. Our best estimate is that growth will slow from an annualised pace of 1.6% to around 0.6% in the second half of 2016, with a similar growth rate achieved in 2017. We can expect inflation to jump to 3% or 4% by the second half of 2017, as a direct result of the decline in sterling. That compares with a previous forecast of around 1.7%.
We expect the Bank of England (BoE) to look through the rise in inflation. Policy will surely be looser than it would have been under Bremain. The BoE will make clear its willingness to offer emergency liquidity to the market, but it may well wait to gauge its response to the slowdown in economic activity. We also expect it will think hard before intervening to defend the pound. The fall so far today has been dramatic, by any standard, with the pound at one point falling to its lowest level against the dollar in 30 years. But the scale of the fall has been exaggerated by the rally preceding the vote. Arguably, a double digit decline in the currency is not an over-reaction to a policy change of this magnitude. Please click here to read the full commentary.

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