The Brexit vote rocked the world’s markets as investors were quick to respond to the surprise of Britain voting to exit the European Union by unloading stocks and piling into gold and other “safe haven” assets. Some economists believe the U.S. Federal Reserve will put off its next rate hike and that the surprise will slow down growth in the U.S.
Brexit vote shouldn’t have been a surprise
In his June 24 “Breakfast with Dave” note, Gluskin Sheff Chief Economist David Rosenberg said it comes as no real surprise that Britain voted to exit the EU. Brexit passed 52% to 48% with a high voter turnout of 72% of registered voters. Rosenberg said that over the last few days, the markets had fully priced in Britain voting to remain in the EU even though public opinion polls suggested the Brits would vote for Brexit. Of course the markets may have gone against the polls because so often they are just plain wrong. However, pricing in Bremain was certainly premature and is to blame for the virtual carnage we’re seeing across the world’s markets.
Rosenberg warns that the odds of a recession occurring in the U.K. surged with the vote to exit, and it’s also a huge setback for the rest of Europe because business spending will likely freeze while consumers start saving more. He adds that U.S. exports to the EU could plunge 20% on the heels of this vote, and that in itself would only impact real gross domestic product growth in the U.S. by half a point.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Brexit reaction is overdone
He adds that the Brexit result “is not a Lehman moment” because no banks are going down over it, but that “the major impacts will be tertiary in nature or indirect, and could be significant.” For example, if the U.S. dollar strengthens a lot over this issue, China’s yuan will become the next focus. He also warns that this raises the risk of another round of devaluation in China that could result in investors beginning to discount “the prospect of a global currency war.”
Rosenberg believes that the market reaction to Brexit will end up being overdone and that this will present a buying opportunity, “especially in cheapened-up U.K. assets,” but he also advises that investors wait for evidence that this is actually the case.
U.S. GDP growth forecast cut: BAML
Rosenberg also said that the already-low global growth forecasts will likely be cut again, and Bank of America Merrill Lynch economists have already cut their GDP forecast for the U.S. Ethan S. Harris and team said in their U.S. Economic Watch report titled “Bruised by Brexit” that they have shaved 0.2 percentage points off their real GDP growth forecast over the next six quarters. They expect Britain’s exit from the EU to “shave a few tenths off US GDP growth, with the drag showing up as early as next quarter.”
Following their 0.2 percentage point cut, their 2016 GDP growth forecast remains at 1.8%, but their 2017 estimate falls to 1.8% as well.
Fed to delay rate hike
The U.S. economy has been in a fragile state for some time, and the Brexit vote is only the latest event in a series of negative shocks. The Fed has been sending mixed signals about rate hikes for quite some time, and Harris and team now expect the next rate hike to be delayed to December. Before the Brexit vote, they had been expecting the next hike to come in September.