This has led to an incredible rally in equities and industrial commodities. At the current juncture, the market expects the Fed to keep rates on hold until at least December, while monetary and fiscal easing is expected out of the UK and Japan. Of course, should those expectations fail to eventuate they could stop the rally short. The greatest unknown for markets is what will happen in mainland Europe. There is a pretty clear consensus that Italy’s banking sector needs a major capital injection, but the Italian government is abjectly refusing to see it happen according to the EU’s new bail-in rules. This is arguably the major pivot point for global markets: if the EU caves and allows a bailout amenable to the Italian government global markets are set to see an incredible rally, but if they don’t the European project could be torn apart and Europe could drive the world into a major global recession.
The rally in markets at the moment is strongly betting that the EU will cave and break their bail-in rules. Italy’s biggest bank Unicredit gained 13.45% overnight and a number of UK property REITs continued to see further strong gains. If the EU does cave then the biggest losers of the Brexit selloff – Italian banks and UK property REITs – could be set for some of the best outperformances.
No currency captures this changing global dynamic better than the GBP/JPY. The pound is gaining in the wake of the UK finally settling on a new Prime Minister and blissfully putting off triggering the Article 50 clause to formally leave the EU. While the yen continues to rally in the wake of Shinzo Abe’s strong result in the Japanese Upper House elections, which has opened the way for greater fiscal and monetary easing. These factors have helped see the GBP/JPY rally 6.5% in two days – an enormous move for developed market currencies – and there seems to be enough momentum behind the pair to push it to 145.