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Uncertainty remains around the Brexit referendum, parlyzing markets

16 May 2016

This week has been extremely quiet on markets with low ranges on asset prices generally speaking.

One thing to keep in mind is the strong pickup in US retail sales, which should bring other positive economic surprises and also boost expectations for the US Q2 GDP (expected at 2.2% as at this Friday). Euro area data was more disappointing, especially industrial production which came out way below expectations. China published its new loans volume which are significantly lower than anticipated. This can be seen either as a good or a bad piece of news.

What is coming up next? Unfortunately, it will probably depend on a very random issue with the Brexit vote on June 23rd. There are other potential risks (Spanish elections, OPEC meeting possibly, etc) but Brexit vote dominates newsflow by far.

The issue is not only that nobody knows for sure what is going to happen (bookmakers quote 75% probability of “Bremain” while polls are very stretched), but that the market reaction in case of Brexit is far from clear. Will the Bank of England cut its rate to restart the economy or will they hike to defend a plunging currency?

In a nutshell, this issue will continue to “block” markets for a few more weeks. We think this is probably why US rates remain so low. This Friday was a case in point, with very good Retail sales and a positive Michigan indicator. However, US 10Y yield continues to fall while the dollar rises sharply.

Lastly, we can note that EM assets have been behaving in an asymmetric way over the last weeks: if economic data is bad, they fall, and if it is good, they fall too, mainly because of the dollar surge.

La Française’s Essentiel Markets brings you an insightful analysis of the latest financial news by François Rimeu, Head of Total Return at La Française Asset Management

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