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BOV Market Watch - Week Ending 24 June 2016
24 Jun 2016
Britons vote to leave the EU. In a historic referendum, the UK voted to leave the European Union after 43 years of membership. The Leave won by 52% to 48% with England and Wales voting strongly for Britain to leave, while London, Scotland and Northern Ireland backed staying in the EU. The referendum turnout was 71.8%, with more than 30 million people voting, the highest turnout at a UK election since 1992. David Cameron announced his resignation as Prime Minister of the UK after the shock victory. The pound fell to its lowest level against the dollar since 1985 as the markets reacted to the results.

Yellen projects gradual rate hikes, warns on Brexit impact. Federal Reserve Chairperson Janet Yellen this week said that she still anticipates ‘gradual’ rate hikes as international headwinds die down. Yellen presented her semi-annual testimony on monetary policy before the Senate Banking Committee saying that a “cautious approach” on interest rates “remains appropriate” amidst “considerable uncertainty” about the economic outlook. The Brexit vote in the U.K. could have “significant economic repercussions” if the British vote to leave the European Union, Yellen said. The Federal Reserve gave its assessment of risks related with the Brexit: “Even given moderate financial vulnerabilities, a number of possible external shocks, including if the United Kingdom chooses to leave the European Union in a pending referendum, could pose risks to financial stability.”

German investor confidence jumps despite looming Brexit vote. A survey result from the Centre for European Economic Research or ZEW, published this week shows that the Germany’s economic confidence surged in June at 10-month high. The Zew Institute said that the economic index of economic confidence rose from 6.4 in May to 19.2 in June, though it was expected to drop to 4.8 points. This was the highest score since last August, when the reading was 25.0. Investor confidence in the current economic situation in Germany gained 1.4 points to reach a five-month high of 54.5 points in June. The anticipated score was 53.0 points. Though, it fell 0.8 points for the Eurozone. ZEW President Achim Wambach said in a statement “the improvement of economic sentiment indicates that the financial market experts have confidence in the resilience of the German economy.”

German high court rules ECB's OMT program legal. Germany's Constitutional Court in Karlsruhe has rejected a legal challenge to the ECB's Outright Monetary Transaction (OMT) programme. The bond-buying programme allowed the central bank to buy debt of financially strained countries. The case was brought by thousands of German plaintiffs who argued that the so-called OMT scheme violatesthe ECB mandate and stripped the German parliament of the right to approve or to reject burden-sharing financial guarantees amongst the Eurozone countries. Karlsruhe did not come up with a complete opposition to OMT but the court raised a number of objections such as requesting for the scope of any involvement in the programme by the German Central Bank.

The U.K. budget deficit narrowed in May. The Office for National Statistics (ONS) stated this week, that the public sector net borrowing was GBP 9.7 billion in May compared with the GBP 10.1 billion a year earlier. In a Bloomberg survey, the median forecast was for GBP 9.5 billion deficit which exceeds the projected level of GBP 9.4 billion. Of the GBP 9.7 billion, GBP 1.9 billion are related to infrastructure spending and the other GBP 9.7 million are linked to the cost of the “day-to-day” activities of the public sector. Public sector net debt constitutes to 83.7% of Gross Domestic Product (GDP). The figures were published amidst warnings about the damage a Brexit would do to the public finances.

U.S. new home sales drop from eight-year high. The Commerce Department revealed that new U.S. single-family home sales fell in May from a more than eight-year high. The report showed that new home sales dropped by 6% to an annual rate of 551,000 in May. April’s sales rate was downwardly revised to 586,000, which still represents the highest rate since February of 2008. Economists had forecasted new home sales to fall by 8.7% to a rate of 565,000 from the 619,000 initially revealed in the preceding month. New home sales in the South fell by 0.9% and in the Northeast it tumbled by 33.3%. Sales in the West fell by 15.6% and in the Midwest surged up by 12.9%. The Commerce Department said that the median sales price of new houses sold in May was $290,400 up by 1.0% from $287,400 a year ago and down by 9.3% from $320,200 in April. In the meantime, a report by the National Association of Realtors showed that in May, existing home sales increased to their highest level in over nine years.
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