Brexit fears weigh on global stock indices

Fears that the UK will vote to leave the EU are sending shockwaves through global stock indices, with weaker European markets like Greece, Portugal and Italy the worst hit. However, there could be a good bounce back if UK voters opt to remain in the EU.

Data board
Source: Bloomberg

Brexit concerns appear to be hitting European Union markets deemed to be the weakest the weakest the hardest, possibly based on speculation that Britain’s exit would hasten the EU’s demise. However, Greece, Italy and Portugal are likely to see the strongest rallies in the event Remain wins.

Global indices performance:

Global indices chart

European markets have all seen the most significant drops in the forward price-to-earnings ratio as Brexit concerns continue to hit price levels. Last week, Greece was the third-highest valued market at 19.9, but has now dropped dramatically to 16.9.

Forward price-to-earnings ratios:

Forward price-to-earnings chart

In price-to-book terms, Italy, Austria and Chinese H-shares all make up the bottom three. Brexit concerns and disappointment that China did not make up a larger part of the MSCI’s new index weighting seem to be driving these low valuations.

Price-to-book ratios:

Price-to-book chart

Australia’s ASX and the FTSE in London continue to top the global rankings for dividend yields on offer, and in the wake of the dovish US Federal Reserve meeting, where the US central bank held interest rates and signalled that the path of future rate hikes would be shallower, funds seem to be heading to Australia while the spectre of Brexit hangs over the FTSE and other high-yielding European markets.

Global dividend yields:

Global dividend charts

The Relative Strength Index (RSI) is a momentum oscillator that shows whether the sum of recent gains have been higher or lower than the sum of recent losses. The RSI gives readings of 0-100 and in a sideways trading market values above 70 or below 30 are traditionally thought of as reversal signals. Otherwise, it is a useful gauge of momentum.

Relative strength index (RSI):

Relative strength index chart

Moving averages also indicate an index’s momentum. Here we have used the 10-day, 20-day and 50-day moving averages and looked at which indices are trading above all of them or below all of them. And the swathe of red “Yes” indicate how risk-off sentiment is dominating global markets.

Moving averages:

Moving averages chart

The FTSE Athens 25 has lost over 15% in the past week. Brexit concerns appear to be weighing on the weakest links of the European Union on the logic that Brexit could precipitate the formal break-up of the union. The GR20 is likely to continue to see selling in the lead up to the Brexit vote and it is quite likely to drop through key support at 148. However, should the Remain camp win the Brexit vote, Greece could see a massive outperformance.

Greece 25:

Greece 25 chart

The Amsterdam Stock Exchange has smashed through support at 426. Netherlands is also one of the top candidates to follow the UK out of the EU should the Leave side win the UK referendum. The lead up to the UK referendum is likely to see further downside for the AEX, and should Brexit pass a trip to 385 and lower seems highly likely.

Netherlands 25:

Netherlands 25 chart

The FTSE MIB 40 has similarly been hit by Brexit concerns, losing 7.8% over the past week and seeing a negative 22.9% year-to-date return – the worst of our indices. There looks to be momentum behind a move down to 16,000 in the lead up to Brexit. And were Brexit to pass, the MIB would be set to plummet through the 16,000 support level.

Italy 40:

Italy 40 chart

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