Performance, June 2016

04.07.2016

News

Brexit resulted in great furore

The all-important event to the global financial markets in June was the UK wish to exit the EU - Brexit. Even though the referendum was merely an advisory referendum, quite a close vote with a majority for 'remain' in Scotland, Northern Ireland and London, the UK will most likely exit the EU.
Even though the long-term consequences of a UK exit from the EU are difficult to predict, the financial markets were quick to find their feet again. Even though the outcome leaves the UK in a political chaos for both major parties – Labour and the Conservative Party. Also, the politicians that headed the 'leave' campaign do not seem to have clear plan for the UK exit.
On the other hand, the leaders of the other EU countries used fairly tough rhetoric - and asked the UK to make a fast announcement.
Investors were concerned that the UK exit might lead to doubts as to the weakest countries' position in the EU and that Euroscepticism would flare up in several member states.
The upcoming exit of the UK from the EU has already caused concerns on the part of several credit rating agencies - and they lowered their outlook for the UK.
The uncertainty in the financial markets cause yields on the most secure European countries' government bonds to fall further. Consequently the 10-year German government bonds followed the example of the corresponding Swiss government bonds and are now trading at negative yields, while Denmark was close to follow suit as well.

The Fed lowers expectations of interest-rate hikes this year

Following the most recent FOMC meeting, the Fed issued very subdued announcements about potential interest-rate hikes this year than has previously been the case. Some reasons for this were the uncertain consequences of a Brexit but also the very weak US labour market report. The weakest report since June 2011. Officially, no importance has been attached to the upcoming presidential election in November, but the prospects of an election battle between the first female presidential candidate ever – Hillary Clinton - and the controversial plutocrat and Republican presidential candidate Donald Trump may also have some impact.

Interest shifted from energy to IT – following good financial statements, among other things

The global equity and FX markets were on a roller-coaster ride in June - not least at the end of the month in the wake of the surprising UK vote to exit the EU. The prospects of a political tug-of-war in Europe over the coming months resonated in all the global capital markets. The markets were also characterised by fluctuations over the month, for instance, due to the Brexit opinion polls. Danish investors lost 5% on UK equities because pound sterling lost value against the Danish krone. The development was even worse fro the Southern European equity markets. Investors were concerned that the UK exit might lead to renewed doubts as the weakest countries' position in the EU and the that Euroscepticism would flare up in several member states. In terms of Danish kroner, the Spanish and the Italian equity markets shed 8-10% and the worst development was seen in the Greek equity market, which fell by more than 20%.

Historically low bond yields

Even though the opinion polls prior to the UK EU vote showed a very tight vote, it came as a surprise to the bond markets that the outcome was an exit. The subsequent reaction was in the form of falling yields in the leading countries. For the first time, yields on 10-year German government bonds were negative, while in Denmark it was still slightly positive. Initially, reactions in Spain and Italy were negative, but subsequently yields have also fallen in these countries.
The emerging bond markets had a fantastic month. With returns above 6%, especially the local currency markets performed much better than expected. The high returns cannot be attributed that much to country-specific factors, rather to the view among investors that a Brexit would lead to low central bank rates for an extended period of time.
In respect of corporate bonds, reactions were more moderate. Low-ranking bonds were affected by the rising risk aversion and yielded a return close to zero, while higher rated bonds yielded about 1% in June.