World Economy

Brexit Fear Grips Markets

Brexit Fear Grips MarketsBrexit Fear Grips Markets

Global investors will be eyeing monetary policy announcements from two of the world’s leading central banks over the next 48 hours to provide reassurance.

Tuesday’s session saw investors abandon risk-laden assets, sending share markets into a downward tailspin which saw London’s benchmark FTSE 100 close down by over 2% at 5,923 points—the first time it has ended a session at below the 6,000 threshold since February, Currency News reported.

However, the broad-ranging S&P 500 index in the US shed a considerably lower portion of its value on the day—only 0.18%. The relative lack of panic amongst US equities traders whilst those around them lost their heads suggests that they remain confident that tonight’s US Federal Reserve decision will not yield an interest rate hike.

Futures markets attest to this, with the implied likelihood of an increase in the cost of borrowing Stateside standing at only 1.9%. US investor sentiment was further assisted by a better than expected set of domestic retail sales figures, published last month. The US Commerce Department report pointed to a healthy 0.5% uplift in American shop sales during May–a figure which built on April’s showing of 1.3%.

  Safe Havens

Investors have responded to the pro-Brexit momentum by selling stocks and putting their money in safe havens, with Europe’s main markets down sharply and the euro hitting a 3.5-year low, Aljazeera reported.

For the first time, demand for German government bonds viewed as rock-solid investments on Tuesday pushed their yields into negative territory.

As the campaign enters its final stretch, a poll by ComRes showed the race on a knife edge, with support for remaining at 46% and the pro-Brexit side on 45%.

This contrasts with a result from the same pollster just one month earlier in which the pro-remain side had an 11 point lead.

The day before Osborne’s remarks, rivals from the Remain and Leave camps clashed in a debate live-streamed on YouTube.

“The whole European project is a machine for generating excessive bureaucracy and red tape,” said Boris Johnson, a Conservative former London mayor and leading pro-Brexit campaigner. “It is an economic disaster area.”

Alex Salmond, the former Scottish National Party leader who is campaigning to remain, countered that the EU brought social and worker protections and allowed Britain access a trade market of 500 million people. The bloc had brought “peace and stability” to Europe, he said.

But after the debate, Osborne’s warning was dismissed by a pro-Leave Labor politician, John Mann.

“This is more scare tactics from the Remain side,” Mann said.

“If we vote to leave and take control of our money we will have more to spend on the priorities that matter to us like the National Health Service.”

  Budget Cuts

Chancellor George Osborne says he will have to slash public spending and increase taxes in an emergency budget to tackle a £30 billion ($42.5 billion) “black hole” if the UK votes to leave the European Union, BBC reported.

The chancellor said this could include raising income and inheritance taxes and cutting the NHS budget.

In response, the basic rate of income tax would be raised, inheritance tax would be increased, and the budget for services including the NHS would be cut, he said.

But 57 Tory MPs have said his position would be “untenable” if he tries to cut NHS, police and school spending.

  BoJ Also Eyed

On the other side of the world, investors are expecting action from another of the planet’s premier central banks. Persistently low levels of domestic inflation and the resurgence of the Japanese yen during recent months means that the pressure is now on the Bank of Japan to act when it makes its latest policy announcement.

The potential that the UK will vote for a Brexit next week places additional onus on the BoJ to loosen its policy.

The BOJ is likely to keep policy steady at the two-day rate review ending on Thursday, Reuters polls showed, as many policymakers want more time to scrutinize the effect of January’s surprise decision to adopt negative interest rates.