The Brexit Thread—–How Global Markets Could Unravel
DavidStockmansContracorner.com
June 19, 2016
If Britons vote to take their country out of the European Union on June 23, no corner of the global financial market complex will emerge unscathed.
The invisible thread that links assets as diverse as gold, bank stocks, the Japanese yen and government bonds would be yanked sharply by Brexit, an event the Bank of England said on Thursday risks “adverse spill-overs to the global economy”.
With global interest rates and bond yields the lowest on record, central banks running low on crisis-fighting tools and the post-2008 economic recovery flagging, that thread could quickly unravel, with serious consequences for all markets.
So why will the will of one country’s people in one referendum have such a profound impact on global markets?
The answer is partly how interconnected global markets are, and partly timing – the world economic cycle is already very long in the tooth and central banks have far fewer options open to them after nearly a decade of extraordinary policy support.
INTEREST RATES, YIELDS
Global interest rates are their lowest for 5,000 years, according to Bank of America, but central banks could still cut them further. That could mean the U.S. Federal Reserve reversing its slow-starting tightening cycle, and European Central Bank and Bank of Japan rates going deeper into negative territory.
Lower rates would also depress bond yields even further, tightening the screw on central and commercial banks.
Over $8 trillion worth of sovereign bonds already carry a negative yield, according to JPMorgan. This means holders of Japanese, German and Swiss debt are paying these governments for the privilege of lending to them, in some cases out to 20 years.
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