The feedback loop between financial markets and the real economy has been positive this summer, relegating the status of the June 23 Brexit vote from a global scare to a domestic UK political matter. The current environment remains supportive for risky assets.
The positive feedback loop that has developed between markets and economies may be the best evidence yet that the fallout from the Brexit vote is far less dire than many feared in June. With market and sentiment channels transmitting little or no Brexit-shock into the real economy in the rest of the world, the UK political drama has swiftly morphed into a local problem rather than a global scare. Recent economic data also suggest that mainland Europe, the region most at risk of contagion, has been remarkably resilient post-Brexit.
Broad support for risky assets
Economic and earnings data have been a support factor globally. Positive macro data surprises in developed markets reached a 2.5-year high this month. Second-quarter corporate earnings in the US and Europe came in better than expected. The global policy mix is shifting to an easier stance again, with the Bank of England and the Bank of Japan both easing further and remaining biased to do more. The fiscal gears are also starting to turn. Japan’s government announced a large stimulus package and the US and UK governments are hinting at fiscal stimulus measures in the 2017-18 period.
With investor sentiment turning positive for the first time this year and cash levels reaching 15-year highs, the right conditions for some of that money coming into the market are emerging. The flow momentum seems likely to remain a support factor for risky asset classes like equities, real estate and fixed income spread products, at least until technically overbought levels are reached, or until new macro or political shocks occur. With neither of those on the radar at this stage, we keep our risk-on stance tilted to these asset classes.
Jacco de Winter is Senior Financial Editor at NN Investments Partners.
