Risk aversion is driving financial markets for a third day on Wednesday, with equity markets coming under pressure, bond yields falling and safe haven assets such as Gold and the yen on the rise.
Negativity finally appears to have gripped investors after following a rebound last week that appeared to suggest that Brexit fears were easing. These have ramped up this week with the latest concerns coming from the commercial property sector after funds blocked withdrawals due to a lack of liquidity in the market.
The Italian banking sector is adding to investor concerns right now, with the size of non-performing loans on the books and the dispute between the Italian government and the E.U. on how to resolve it causing concerns around the industry to resurface. There’s just a growing number of risks bubbling over right now and it’s becoming increasingly tough to not be concerned.
With so much focus on Europe right now, the U.S. economy and the Fed’s tightening cycle has fallen off the radar for now. The central bank is very unlikely to continuing its tightening process at a time of such uncertainty and risk adding to the already growing number of risks. The minutes from the June meeting will be released tonight and it’s likely to draw less attention than it would have in the event of a vote for the U.K. to remain in the E.U..
There were already questions being raised about whether this summer was the right time to raise interest rates again but this now appears off the table altogether. The meeting also took place before the U.K. referendum which to an extent makes any views expressed in the meeting a little dated. A lot has changed since the meeting took place. That said, it will be interesting to see whether policy makers discussed a course of action in the case of a Brexit which could offer insight into when we can expect the tightening cycle to resume. As it stands, the markets have all but priced out a hike this year.
Source – CME Group FedWatch Tool
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