Interesting and Positive Developments, Post-Brexit – there’s been a slew of interesting news following the Brexit and, in our view, most of it points to the positive. We’ll just list-off a few here. First, both of the outspoken proponents of the “Leave” vote—Nigel Farage and Boris Johnson—have moved into the shadows. Mr. Farage has resigned and Mr. Johnson has taken his hat out of the ring to become the next Prime Minister. These are fairly cowardly moves by both gentlemen, considering they spearheaded the movement to “Leave” but now aren’t around to see it through. This week saw the initial rounds of selecting the new Prime Minister, and Home Secretary Theresa May gained the most public endorsements and appears to be the frontrunner. Interestingly, she was in the “Remain” camp, and has stated that she wants to have preliminary discussions with the European Union before invoking Article 50 (which sets into motion the actual exit). Could Britain have a chance of remaining in the union after all? It will be fascinating to watch. Meanwhile, the Bank of England has taken steps to support the U.K. economy in the case of any fallout—they pushed the capital buffer requirement to zero, which should free up about 150 billion pounds for British banks to lend. There have also been proposals to slash the corporate tax rate to less than 15% (from the current rate of 20%), which would increase corporate appetite to stay and grow in the U.K. All in all, the reactions to Brexit have leaned to the bullish so far, we believe.
Strong Manufacturing in Europe Ahead of Brexit – data suggests that Europe was on a fine path of expansion prior to the Brexit vote, both in terms of manufacturing and business purchases. Eurozone PMI (Purchasing Managers’ Index) ticked up to 52.8 in June from 51.5 the previous month, and business growth posted a reading of 53.1—well above most estimates. Taken together, the surveys suggest that euro zone GDP growth would have come in at around 0.3% for the year, which is small but at least not recessionary. But, that was before the Brexit vote. Uncertainty could hold back further investment and new activity, which is yet to be seen. Though the terms of the relationship (regarding trade and labor movement) between the European Union and Britain probably won’t change for at least two years, businesses may enter wait-and-see mode.
Breaking Records, Part I: energy independence, anyone? The United States has (somewhat) quietly undergone an energy revolution, having evolved into one of the world’s biggest producers. A new milestone was reached recently (reported in a research study by Rystad Energy) that the U.S. has more oil reserves (264B barrels) than Saudi Arabia (212B) and Russia (256B). This marks the first time in history it has surpassed the world’s biggest exporting nations.
Breaking Records, Part II: in the aftermath of the Brexit, yields continued sliding into record low territory. Earlier in the week, the 10-year hit a record low of 1.378%, and the 30-year also dipped into record territory by falling to 2.15%. Rising demand for Treasuries is likely a culprit for falling yields, as investors flock to safety in the face of uncertainty.
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