Faced with the competing influences of increased risk but ongoing low interest rates; international stock markets went risk on last night.
Violent market moves like those which followed the Brexit vote tend to create volatility clusters. I often takes some time for markets to become more orderly after an event like the Brexit vote. This can mean big counter trend moves. This volatile behaviour is evident in the British Pound which finished 1.7% above the low it established on Monday but still remained well within Monday’s trading range in a classic sign of nervous, drifting behaviour.
The stock market will have a solid opening today as it follows international investors in a risk on move. The change in sentiment last night was reflected in US markets where cyclical sectors like energy; financials and Information Technology attracted the greatest support.
While share markets have been rattled by the increased macro risks created by Brexit, they also need to take account of the impact this has had on the outlook for interest rates. Bond yields have dropped and markets now expect no action by the Fed this year. This creates a supportive environment for stocks
Despite the likelihood of a good session this morning, it’s likely that markets will leave a Brexit risk factor in pricing for a while yet. Stock markets may find it difficult to return immediately to the levels seen before last week’s vote with buyers being wary about being too aggressive in what may yet be just another volatile swing.