Risk assets rise together with safe havens following Brexit vote

· Gold, silver do best following Brexit
· Safe government bonds, stocks also do well
· If situation is not so bad, difficult to justify more stimulus

One surprising aspect of the post-Brexit financial environment is how various assets have reacted to this unexpected event. Safe havens did very well as was expected, but perhaps less expected was how quickly risk assets shook off the post-Brexit blues and turned around to post a positive performance.

As the chart shows, silver and gold have been the primary beneficiaries of Brexit. Precious metals benefited from the combination of safe haven flows as well as the expectation of additional monetary stimulus from some of the biggest central banks in the world. The theme of loose monetary policy following Brexit has been a key driver of markets. Low interest rates for longer also boost the allure of zero-yielding gold and silver.

For example, presently, the Bank of Japan and the Bank of England are highly likely to deliver extra stimulus. The European Central Bank could also join in by delivering more stimulus as Brexit has led to a deterioration of the Eurozone’s economic prospects as well. The US Federal Reserve looks like holding its key interest rate at 0.50% for the foreseeable future, as Fed officials such New York President William Dudley have hinted that inflation is relatively low and that it is better to wait and see how global developments play out before raising rates.

Next in the performance tables, UK gilts, the US 10-year Treasury note and the German 10-year Bund also did well. Not only did safe long-term bonds benefit from the flight to safety, but the prospect of low interest rates and loose monetary policy drove yields to levels that were difficult to imagine only a few quarters ago. For example the 10-year British Gilt is barely yielding 80 basis points, while the German 10-year Bund has a negative 10 basis point yield and the Japanese bond yield is a negative 27 basis points. The US 10-year yield has climbed back from sub-1.40 to yield nearly 1.50% - one of the higher yields that is available on a major currency.

As pre-Brexit economic data have been showing a world economy that was growing at a steady pace, many in the markets are also hoping that the Brexit-induced negative aftereffects will be moderate. The effects outside the United Kingdom might not be discernible, according to the Reserve Bank of Australia. Therefore risk assets had a chance to rally while central banks such as the Fed are waiting for the situation to clear up and other banks are acting either to boost their economies (BoJ) or to preempt the negative effects of Brexit (BoE, ECB). Cautious policymakers and a steady course by the global economy have been encouraging to investors.

Therefore stocks have also done well in the aftermath of Brexit. Asian equities ex-Japan were some of the better performers as the region was seen as too far away from the problems between the EU and the UK. Emerging markets also did well in the aftermath of Brexit, as they were also seen as less affected by any turmoil. This was interesting since emerging market assets are usually amongst the first that get liquidated when investors want to make their portfolios safer. The US stock market benchmark and arguably the world’s most closely watched index, the S&P 500, made a new all-time closing high 2 ½ weeks following Brexit, after coming back from a 5% selloff.

The one commodity that is clearly doing worse following Brexit has been crude oil, but this has more to do with suspicions that oil supply might not be falling anymore in the United States and there are also no new supply disruptions around the world.

To sum up, the world’s financial markets have done very well in the aftermath of Brexit – particularly given that on the actual day of the referendum they were expecting a win by “remain” and given that this was an event that analysts were fretting about for months now. At the same time, it would be wrong to sound the all clear, since there is still significant uncertainty attached to what the final relationship between the UK and the EU is going to look like. It also remains to be seen what monetary stimulus will finally be arriving. Markets might like the idea of additional stimulus, but if the impact of Brexit on the rest of the world turns out to be small, policymakers might have difficulty justifying more action.