In the next couple of days, it will be a month after Brexit referendum which most people voted to leave the European Union. Just before the referendum, there were so many arguments in favour and against voting to leave or staying in the Union. The most controversial of all was that the UK economy will go into recession global economy will also feel the impact crash and UK might not get a trade deal anytime soon. To the biggest surprise of those expecting a market crash, Brexit seems to be a blessing for the financial markets. We have seen SPX500 making a new record high at 2177, Dow Jones also made a new record high at 18,650 while FTSE 100 has rallied back above 6,700. The biggest loser so far has been the Great British Pound (GBP) that has lost more than 10% of its value in the last couple of weeks. This is however a good thing for manufactures in the UK, this helps them to export at cheaper prices which allows for higher profit margin.
Looking ahead into what all major central banks policies could be as we go through this summer and considering possible impact of post-Brexit. Firstly, Bank of England is likely to introduce Quantitative easing. It could come as early as August which is the next BoE meeting. The major impact this policy will be a knockdown impact on GBP and the stock market is likely to rally to new highs. I expect BoE to leave interest rate unchanged. Also, European central Bank is expected to keep policy unchanged later today. The president will give a press conference where he will highlight possible policies to be adopted later on.
Secondly, Bank of Japan is expected to introduce an alternative to the ongoing QE called “Helicopter money” this has never happened before in any part of world. This policy is expected to stimulate growth, drive demand and drive inflation towards the 2% target of BoJ.
Furthermore, the Federal Reserve might hint at some 0.25% hike towards the end of the year. This will base based on incoming data from the United States economy in the next couple of weeks. if we continue to see stronger data, the Federal Reserve might be tempted to push for a rate hike.
Finally, china has been a major economy with a lot of doubt regarding the slowdown in their economic activities. Chinese economy has been a bit slow as a result of fall in global demand. Chinese government is now trying to diversify her economy away from manufacturing into a service economy. In an attempt to achieve this, we have seen many attempts to devalue the Yuan through massive stimulus. This has helped devalue the yuan to an extent and we have seen a rebound on Chinese GDP toward the 2016 target of 6.5% -7%. The big question is, if PBOC stop injecting money into the economy, can the growth be sustained?