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After the Brexit storm

June 23 2016 will be a date that will be remembered in years to come. Children will learn about it in history lessons and analysts will include it in their models when trying to capture Black Swan events.

It was the worst one-day drop in equity prices in history - and what’s worse is that it happened on a Friday. Anything could have happened during the weekend so investors who did not want to take any chances continued dumping stocks on the market.

We started off the week with another down day. But markets started to turn on Tuesday as investors started to see some positivity in all of this. In fact, ironically as it may seem, the FTSE 100 got back all of its losses and is now trading in positive territory.

The reasons for this change in sentiment is as follows:

Potential for further stimulus by the Bank of England

Bank of England Governor Mark Carney said the central bank would probably need to pump more stimulus into Britain's economy over the summer after the shock of last week's decision by voters to leave the European Union.

Carney also said he would not consider resigning from the Bank if his critics from the referendum's Leave campaign, who were angered by his warnings of a Brexit hit to Britain's economy, end up filling a power vacuum in the government.

ECB could add to stimulus if inflation worsens

The European Central Bank is in no rush to ease its monetary policy in response Britain's vote to leave the European Union, taking comfort in a calmer-than-feared market reaction.

They stressed the ECB's willingness to provide more stimulus if the inflation outlook worsens but cautioned the UK vote was raising political questions that were for EU governments and institutions, rather than the central bank, to answer.

Not a Lehman scenario

The UK's Brexit vote has not triggered a "Lehman moment" in financial markets, despite the sharp sell-off.

Vítor Constancio, the vice-resident of the ECB, denied comparisons between the UK's vote to leave the EU and the 2008 collapse of Lehman Brothers that triggered the global financial crisis.

The reaction to Lehman was that several markets froze with a big impact all over the world. That was not the case this time.

The second point is that the negative effect on prices in markets was more extended in the case of Lehman that indeed triggered a major international crisis. So the reactions of markets so far do not justify the comparison.

Conclusion

The recovery in markets over the last week was a result of traders taking positions following the biggest one-day crash on record. However, there is still a lot of uncertainty in the markets.

For those investors tempted to get back in the markets, do so with caution because we are in for a bumpy ride.

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

 

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