Economics Brexit first impact

Transcription

1 Economics Brexit first impact DBS Group Research June 16 UK voted to leave the European Union on 3 Jun. The final tally was 51.9% to 8.1% in favour of the exit GBP/USD plunged 1.5% to a low of 1.3 around noon Singapore time from a high of Risk aversion was evident during the Asian session. Stocks fell across the region. The JPY and the USD were the only safe haven currencies S&P says Brexit could hurt UK s triple-a rating. This will hurt given the country s current account and budget deficits Prime minister Cameron has announced his resignation effective October Asia ex-japan currencies could be hurt if other EU countries follow suit and call for a referendum. The EUR would fall The ECB wouldn t mind a weaker euro especially if oil prices fell further and renewed fears of deflation The economic outcome remains uncertain. Markets remains fluid. We will revisit our currency forecasts early next week by which time some of the dust will have settled Brexit referendum results % of total votes GBP/USD plunges on Brexit 1.5 Bremain 8.11 Brexit Jan Feb Mar Apr May Jun Jul Philip Wee (65) philipwee@dbs.com 1

2 Brexit referendum results UK's twin deficits are wide % of total votes % of GDP Bremain Brexit - Current account Maastricht Criteria for budget Budget balance Brexit negative outlook for GBP UK voted on 3 Jun to leave European Union (EU). The final tally showed 51.9% of voters in favor of the exit. Like the general elections in 15, the outcome went against opinion polls and bookmaking bets that favoured Bremain. Once it became evident that Brexit would prevail, GBP/USD plunged below 1.. By noon Singapore time (GMT +8), GBP/USD had fallen by 1.5% to 1.3 from an early morning high of While GBP/USD has rebounded to 1.39 by end-asia trading, it is premature to conclude that the worst is over. Standard & Poor s warned that Brexit was likely to hurt its triple-a sovereign debt rating. This will hurt considering the UK current account deficit exceeded 5% of GDP in 1 and 15. Meanwhile, the public budget deficit remains a hefty.3% of GDP as of 15. We reckon a worst case scenario for GBP would be a 1-% depreciation on a trade-weighted basis. This would imply GBP/USD could still fall to , with overshooting risks to 1.5, which it hit in Much uncertainty remains. Prime Minister David Cameron has announced his resignation but added that a new PM would only be in place when the Conservative Party conference in October. GBP/USD after the 1985 Plaza Accord low ERM crisis Fed Funds Rate (% pa, left) GBP/USD (right) Global financial crisis Worst case for consensus GBP to fall 1-% in trade-weighted terms

3 The fallout from the Brexit referendum during the announcement of results MAJOR CURRENCIES B R I C S EMERGING ASIAN CURRENCIES % change vs USD, Jun 16 vs 3 Jun * USD is performance of DXY index -8.3 JPY USD CHF CAD NZD AUD EUR GBP BRL INR CNY RUB ZAR HKD VND THB IDR PHP TWD MYR SGD KRW Brexit-led risk aversion The fallout from Brexit was not confined to the GBP and UK financial markets alone. Once GBP/USD plunged below 1., risk aversion quickly set in. Only the JPY and the USD emerged as safe haven currencies. USD/JPY fell briefly below its psychological 1 level. With Brexit clouding global growth prospects, externally dependent currencies such as the KRW, SGD and TWD were hardest hit. Expect more weakness when EUR/USD starts moving lower towards the floor of its post-qe range between 1.5 and 1.1. Stock markets across Asia also sold off. US futures market pointed at one time to a 7-point drop in the Dow. The US 1Y bond yield fell to 1.61% from 1.758% a day ago, not far above its % low in Jul 1. The Eurozone 1Y bond yield fell back into negative territory. Brent crude oil prices fell below $8/barrel from yesterday s close of $5.91. In currency markets, risk aversion was best reflected by the lower JPY crosses such as GBP/JPY, EUR/JPY, AUD/JPY and NZD/JPY. Against the GBP, the Sing dollar rose to its strongest level in history. Bond yields fell to new lows after Brexit 3.5 % pa US 1Y bond EU 1Y bond Flight to safety into JPY USD/JPY Psychological 1 level 1 98 Jan Feb Mar Apr May Jun Jul 3

4 Asia ex Japan currencies at risk to weaker EUR If oil prices fall, so could EUR EUR/USD (left) weaker EUR Post-QE range for EUR/USD 1.5 to 1.15 ADXY Index (right) weaker Asia ex Japan currencies EUR/USD (left) weaker EUR Post-QE range for EUR/USD 1.5 to 1.15 Brent crude oil prices ($/barrel, right) Jan-1 Jan-15 Jan Jan-1 Jan-15 Jan Asia ex-japan currencies watch the euro Given this year s high correlation between Asia ex-japan (AXJ) currencies and the EUR/USD, one must closely watch the spillover from a weak euro. So far, EUR/USD has only depreciated 3.8% compared with 9.9% in GBP/USD. From a fundamentals perspective, the UK is the second largest economy in the EU. Without a new prime minister in place until October, there is little clarity in terms of policy direction. For example, while UK has voted to leave the EU, the exit won t be formalized / legalized for some months. Domino effects could arise with Brexit inspiring other EU countries to call for their own referendums. The Netherlands, Spain, France and Greece will be closely watched for such. Will this bring renewed break-up fears such as what existed in 1-13? Our sense is that the EU is less vulnerable than it was during the sovereign debt crisis. Current account surpluses are higher and budget deficits are back within Maastricht criteria. Nevertheless, risk aversion could drive oil prices lower and renew deflation fears, prompting the ECB to further ease monetary policy. In turn, a EUR/USD below its post-qe range could also weaken the Chinese yuan, which now tracks the major currencies more closely. Eurozone is more stable now ECB is still fighting deflation % of GDP Current account 5 % YoY - Budget balance 3 Inflation target Maastricht Criteria for budget Core inflation CPI inflation

5 Defensive With markets still fluid, the only strategy is to remain cautious / defensive. We will revisit our existing currency forecasts early next week by which time, with luck, some of the dust from today s events should have settled. 5

6 GDP & inflation forecasts GDP growth, % YoY CPI inflation, % YoY f 17f f 17f US Japan Eurozone Indonesia Malaysia Philippines Singapore Thailand Vietnam China Hong Kong Taiwan Korea India* Source: CEIC and DBS Research Policy & exchange rate forecasts Policy interest rates, eop Exchange rates, eop current 3Q16 Q16 1Q17 Q17 current 3Q16 Q16 1Q17 Q17 US Japan Eurozone Indonesia ,391 13,793 13,973 1,15 1,331 Malaysia Philippines Singapore n.a. n.a. n.a. n.a. n.a Thailand Vietnam^ ,3,359,359,359,359 China* Hong Kong n.a. n.a. n.a. n.a. n.a Taiwan Korea ,179 1,19 1,196 1,199 1,1 India ^ prime rate; * 1-yr lending rate Market prices Policy rate 1Y bond yield FX Equities Current Current 1wk chg Current 1wk chg Index Current 1wk chg (%) (%) (bps) (%) (%) US S&P 5, Japan Topix 1, -3.7 Eurozone Eurostoxx,7-1.1 Indonesia JCI,835. Malaysia KLCI 1,63 1. Philippines PCI 7,63.1 Singapore Ccy policy FSSTI, Thailand SET 1, China S'hai Comp, Hong Kong Ccy policy HSI,59. Taiwan TWSE 8, Korea Kospi 1,95-1. India Sensex 6, Source: Bloomberg 6

7 Recent Research IN: maturing FCNR (B) deposits a molehill, 1 Jun 16 not a mountain Qtrly: Economics-Markets-Strategy 9 June 16 HK: cautious outlook 7 May 16 IN: monitoring external fault lines 5 May 16 TH: manufacturing gone cold 5 May 16 SGS: bracing for th efed May 16 Global: where lies north? 16 May 16 CN: outbound investments intact 5 May 16 JP: perception gap widens 5 May 16 SG: national vs domestic growth 8 Apr 16 IN: investment cycle slows Apr 16 ID: the new policy rate 18 Apr 16 IN: improving liquidity management 15 Apr 16 SGD: slipping into neutral 8 Apr 16 JP: reflation campaign still has a long way 8 Apr 16 to go CN: what are supply-side structural reforms? 7 Apr 16 CN: root causes and remedies for overcapacity 6 Apr 16 US: what is driving core inflation and 31 Mar 16 when will headline follow? EZ: watching Brexit risks 8 Mar 16 SG budget: balanced and transformative 8 Mar 16 ID: investment eludes Mar 16 Rates: SGS premia compression 1 Mar 16 JP: rising direct investment in Southeast Asia 18 Mar 16 SG: a winter budget 1 Mar 16 Qtrly: Economics-Markets-Strategy Q16 1 Mar 16 IN: fiscal discipline trumps growth 1 Mar 16 Rates: G7 bonds - tantrums brewing 1 Mar 16 Global growth: what is potential and 5 Feb 16 where is it going? ID: BI easing bias persists 19 Feb 16 EZ: negative rates not a cure 17 Feb 16 US: how strong is consumption? 1 Feb 16 SG: the next growth driver Feb 16 JP: BOJ into uncharted territory Feb 16 CNH: will capital controls help? Feb 16 FX: Not just about CNY 1 Feb 16 IN: RBI to await budget cues 1 Feb 16 Rates: Global rates roundup/ chart-pack 9 Jan 16 CN: when is a trillion not a trillion? 9 Jan 16 IN: fading boost from low oil prices 8 Jan 16 TH: consumption the weak link 5 Jan 16 CN: how to end the vicious cycle 1 Jan 16 Global crude: still spilling onto the floor Jan 16 TW: after the election 19 Jan 16 IN: back at fiscal crossroads 19 Jan 16 CNH: Taken the RMB episode 15 Jan 16 Rates: UST curve: belly s too big 15 Jan 16 CN: services and manufacturing are 1 Jan 16 Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. 7