The impact of Brexit on the markets has gone through different stages. There was the initial upheaval in the wake of the referendum result, which had its maximum effect on June 24 when the Ibex recorded its biggest ever fall. And now the stock market and European public debt yields have recovered to pre-Brexit levels. Undoubtedly the worst thing is still the pound’s sharp depreciation: against the dollar it remains at its minimum level for the last three decades, although its performance against the euro is slightly better.
International organisations have recently warned about the consequences of Brexit on economic growth, but in fact they have hardly adjusted their forecasts for this year and have only cut them by two tenths for 2017.
And the markets don’t seem as worried as they were about the UK’s decision to leave the EU. In fact European equities have recovered over the last month or so. The financial markets have faced this event “with encouraging resistance,” as Mario Draghi pointed out.
Much the same has happened in the public debt markets. The German bund yield was at -0.20% at the height of investors’ flight to safe haven assets and is now around 0%. The trend in the risk premium in peripheral markets has been very similar: the Spanish risk premium increased to over 170 basis points and is now around 110.
In the case of the debt market, the ECB’s firewall has succeeded in curbing the initial concerns about the consequences of Brexit. On the other hand, there has been no stopping the hemorrhage in the currency markets.
Brexit has also intensified fears about the solvency of some eurozone banking systems, with Italy at the top of the list, but not forgetting some German banks. The European banking sector is the worst stock market performer (losing nearly 30% of its market valuation for the year as a whole), while the spread on financial fixed income (mainly subordinated debt) has widened.