Brexit: The International Community's Concerns Are Growing

by: Alberto Abaterusso

Summary

With the approach of the referendum on Brexit, scheduled for June 23, there are growing concerns in the international community.

But if GB exits the EU, the Fed may be forced to put in place a QE, proving the positive correlation between the S&P 500 and the Fed.

All this news together increases the uncertainty in the future of the world economy and financial markets.

Will future investments move to gold stocks, gold and other precious metals?

With the approach of the referendum on Brexit, scheduled for June 23, there are growing concerns in the international community.

The final document from the finance ministers from the G7 meeting in Japan says that a Brexit would be a "shock" to the world economy:

"If we leave the European Union, there will be an immediate economic shock that will hit financial markets... People will not know what the future looks like" said the Chancellor of the Exchequer George Osborne interviewed by the BBC in Japan.

Probable rate hike by the Fed in June?

The Fed meeting minutes from April 26 and 27 leave the door open for monetary tightening next month; an increase in interest rates in June is likely if the economy continues to improve.

But if GB exits the EU, the Fed may be forced to put in place a QE, proving the positive correlation between the S&P 500 and the Fed dots as argued by UBS.

The stock market guides the Fed

UBS argues that the most significant driver of changes in the Fed dots from one meeting to the next is changes in equity prices.

Look at the picture below. According to the research by UBS, the monetary policy of the Fed in deciding the changes in the interest rates is driven by the stock market (0.53) rather than by changes in ISM mfg (0.36), inflation (0.20), 2-year yields (0.20), unemployment rate (0.14) and payroll (-0.25):

Just as a reminder:

"the correlation coefficient is a measure that determines the degree to which two variables' movements are associated. The range of values for the correlation coefficient is -1.0 to 1.0. [..} A correlation of -1.0 indicates a perfect negative correlation, while a correlation of 1.0 indicates a perfect positive correlation."( here).

According to UBS study, which observes how various economic and market variables moved with the Fed dots, the S&P 500 is one of the most significant indicators, statistically speaking, of the monetary policies of the USA.

However, a new expansive intervention of the US central bank following the Brexit may raise investor concerns about the global economy and trigger a sell-off in all markets.

Scenarios:

a) The Fed will adopt a monetary tightening in the coming months as anticipated by Yellen;

b) The Brexit will occur with the consequences that we expect in the financial markets considering the existence of a statistically significant positive correlation between the S&P 500 and the Fed's expectation for future interest rates, as argued by UBS.

Will future investments move to gold stocks, gold and other precious metals?

The price of gold will above all depend on the Chinese economy, which if it slows further, could increase uncertainty about the future of the global economy. This could unleash a new wave of panic in markets far worse than we've seen in a long time.

All this news together increases uncertainty about the future of the world economy and financial markets. This is the only thing that is certain to date.

Meanwhile, the news last week was that Soros Fund Management, chaired by billionaire investor George Soros, took up a $263.7M stake in Barrick Gold Corporation (NYSE:ABX) during the first quarter of 2016.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.