OREANDA-NEWS. Global financial markets remained in flux in the past week, with equity markets down on balance and investors still scrambling into safe government bonds. Brexit’s economic repercussions are hard to gauge and oil prices have come down.

Equity prices have trended down in the past week, but there were no signs of real panic, as daily falls generally remained subdued. Ben Steinebach Head of Investment Strategy

On Wednesday, the Netherlands followed in the footsteps of Japan, Germany and Switzerland, and saw its ten-year yields dip below 0%, albeit very briefly. Switzerland, in fact, even saw 50-year maturities hit this nadir and it no longer has any government paper commanding positive yields. At this point, there’s a great deal of uncertainty over the extent to which the European economy will be hit by Brexit. The contraction in German manufacturing announced in the past week – a 1.3% fall in May relative to April – wasn’t exactly encouraging. Granted, this predates Brexit, but the next months are unlikely to see much improvement. 

Meanwhile, the UK economy is showing worrying signs of weakness. Mark Carney, the Governor of the Bank of England, reports that capital inflows are drying up quickly and the property industry – in London in particular – is taking a beating. A UK recession looks inevitable. Although we don’t expect the rest of Europe to head into a recession in the UK’s slipstream, growth has been subdued and is unlikely to really rev up under the circumstances. In anticipation of this climate, oil prices have sunk below 47 dollars a barrel in the past couple of days. The US economy is in much better shape: purchasing manager sentiment in the services industry edged up in June, with the employment index recording a particularly good showing: from just below 50 in May to just ahead of 50 in June. 

And Europe’s economy is sailing straight into a new set of troubles: Italian banks. Italy’s banking industry was much less recapitalised than in the rest of Europe, and banking balance sheets are still bogged down by a slew of bad debts. Prime Minister Matteo Renzi has proposed supporting Italy’s banks with public money, but the rules of the new banking union no longer allow a government to step in: shareholders and bondholders will first have to stump up. At this point, trouble is brewing mostly at the country’s smaller banks, but counterparty risk might also serve to drag down bigger banks.

Equity prices have trended down in the past week, but there were no signs of real panic, as daily falls generally remained subdued. Uncertainties are more macroeconomic than corporate right now. That said, Brexit is affecting individual corporate decisions. Tata Steel, for one, has shelved its plans to sell off its UK operations. One bit of company news unrelated to Brexit was that China’s Midea – an electronic equipment manufacturer with a workforce of 135,000 – is looking to acquire Kuka in Germany – a plan that has run into opposition from the German authorities, incidentally. Kuka is considered a strategically important international robot manufacturer. 

And that’s about all the corporate specifics the markets had to offer in the past week. Price falls can therefore be laid squarely at the door of risk aversion caused by major uncertainties over the economic outlook and resultant downgrades of earnings expectations for 2017. With uncertainty looming less large in the United States than in Europe, US market declines were limited to around 0.5% – and in fact Nasdaq closed 0.3% up on last Friday. In Continental Europe, the falls ranged from 1.5% in Switzerland to 5.3% in Italy, which primarily saw its banking shares squeezed. On Thursday, the Eurostoxx 600 was over 3% lower than last Friday, while the AEX was in the middle of the pack, closing some 3% down at 426.33 on Thursday. By Friday morning the index was moving to just over 427.