Fallout Across the Pond: Brexit Closes Door on Fed Rate Hikes

Brexit has crushed any tepid hopes of a Fed rate hike during the summer and likely for 2016.

While American market participants and most investors in North America do not know it yet, the Brexit vote has officially been tallied, and with it comes a virtual tsunami of financial uncertainty, volatility, and ramifications on financial markets. The historic ramifications of the United Kingdom parting ways with the European Union in a razor thin referendum will not fully be realized right away, however initial results across European financial markets suggest a tidal wave of volatility is headed for the US and morning traders.

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Financial markets are in uncharted territory Friday, with everything from the price of gold to GBP-denominated instruments going haywire. Despite this bedlam, the reality and repercussions across the Atlantic in the US are entirely different, and hold their own unique blend of initial knee-jerk reactions and long-term effects.

Moratorium on Fed Rate Hike Chatter

It was already a back and forth debate about whether the Federal Reserve would again raise rates, leaving many to skeptically wonder if this was simply another posturing move by the central bank. After the bank passed up a June opportunity to raise rates, markets have been largely pricing in a stagnation in rates, especially with a series of warning signs on the horizon in the US economy.

Brexit now slams this narrative shut, with little hope of any interest rate changes for the foreseeable future. Janet Yellen cautioned against Brexit leading up to the vote itself, which having now taken place, will only further serve to castigate any hawkish efforts in the interim.

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The Brexit result is the icing on the cake for dovish proponents of the Fed, with a weaker than expected jobs report already signaling that a June hike was untenable. US Equity index futures are already pointed staunchly lower, with interest rate futures markets also in a state of flux – an initial ocular tests suggests the Fed’s benchmark lending rate is in no plausible shape for a hike anytime soon.

Investments

The other and more pertinent pillar for lay Americans is the impact of Brexit on equity and trading markets. While not yet opened, US markets are in for a tumble Friday as uncertainty is the word of the day. Gold prices have already spiked north of $1300, while global financial markets have already felt a sting Friday.

Furthermore, US real estate was already primed for a shakeup, with mortgage rates extending lower to recent weeks. According to a recent Mortgage Bankers Association report, loan applications have already increased 17% from the Q1 2016, while refinancing was up 10% over the same period.

This is due to a strong correlation of mortgage rates being bound to 10-year US government bonds, which are essentially held hostage by the Fed’s benchmark overnight lending rate. Yellen herself portended the ramifications of a Brexit vote on the US economy.

Another component of Americans that’s slated for a move are 401(k) plans, which invariably are linked to US financial markets. Those would mean retirees teetering on the brink of retirement can ill afford swaths of their accounts being lost to an identity crisis across the Atlantic. Thankfully, UK exposure on indices such as the S&P500 is largely limited, though the aggregate effect of uncertainty is enough to spark any amount of panic across markets in the US.

Finally, US foreign exchange (FX) traders are also in for a wild ride this morning, with the GBP/USD plunging towards 1.30, capping off one of the most schizophrenic trading days in the currency pair’s history. With the pair still in a state of chaos, nobody knows where it will end up, leading many to likely flee for safer or less exposed currency options, or possibly an early weekend.

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