It is already two weeks after the world was waking up to the UK’s decision to leave the EU. This opened up a world of uncertainty, with many questions about what would happen next.

The UK referendum outcome surprised the markets, resulting in the global financial market turbulence. The pound slumped by 11% to its 30-year low. In the meantime, London stock market had immediately plunged by 9% after the market opened. It was the biggest loss since the 2007 subprime crisis. In addition, credit rating agencies downgraded the UK sovereign rating by 1-2 notches and cut credit rating outlook to “negative” from “stable” status.

We in Jefferson Trust believe that there will be an amicable agreement between the EU and the UK, since the EU has a very strong own interest in keeping the UK in the single market in one form or another as its second biggest trading partner. This fits with the fact that the 27 EU countries agreed at their informal summit on last Wednesday to grant the UK access to the single market if it accepts the freedom of movement for workers.  Moreover, we suppose that the high uncertainty on the global financial markets at present should gradually decrease in the coming weeks. Economic growth in the euro zone will barely be negatively affected. The Fed, focused on still volatile financial markets, is unlikely to increase its key interest rate already in the summer but only towards the end of the year.


According to the China Academy of Social Sciences (CASS), Chinese economy will grow at about 6.6 per cent this year. Consumer price inflation will likely rise 2 per cent for the year, while the decline in producer prices will slow. Inflation was running at 2.1 per cent for the first five months of the year, according to the CASS.

The only major impact of Brexit on China that can be identified so far is on the currency. To the extent that Brexit triggers a broad-based dollar rally that is sustained, that makes management of the exchange rate harder. If the dollar goes up a lot then Chinese corporations have a lot more incentive to hold dollars rather than Renminbi. They would start to shift money one way or another from Renminbi into dollars, and that gets recorded as a capital outflow. Then in order to maintain the exchange rate the People’s Bank has to spend reserves.


Since last Friday’s Brexit outcome, the pressure on Asian currencies was relatively small in the range of 1-2%. There are several reasons for that. Asia exports to UK are relatively small, in the range of 1-3% of total exports in 2015. In addition several Asian central banks were reported to have intervened in the currency markets to smooth volatility. There is also some market reassurance that US dollar liquidity will be provided by central banks in the event of liquidity squeeze.

In the past few days, compare to US dollar strength the Chinese yuan was weaker but has remained relatively stable against a basket of currencies. Last week, it was reported that the People’s Bank of China (PBoC) is discussing with onshore lenders to allow them to trade in the CNH market. Supposedly, this will narrow the CNH divergence with onshore rate if implemented.

Precious Metals

According to Google on June 24, the day the result of the Brexit vote was released in the United States, searches for “gold price” increased 769%, “recession” was up 588%, and “value of the dollar” rose 1000%.

In times of market volatility, gold is often seen as a “safe haven” by investors looking for a less risky asset to plough their money into.

Gold enjoyed an excellent week after the Brexit decision. The metal, as expected  reacted positively to the uncertainty caused by the UK’s decision to leave the European Union. The price of the yellow metal has now been on the up for five consecutive weeks, while it has added around 26% to its value over the course of the first half of 2016.

Oil in a global economy

Crude oil prices have so far shown only a modest impact from Britain’s vote to leave the European Union on Thursday.

Britain consumes less than 1.6 million barrels of oil per day, 1.6 percent of the global total, and the country’s consumption has been static or falling since 2005. Britain is now the world’s 15th largest oil consumer, ranking far behind the United States and China but also behind Brazil, South Korea, Germany, Canada, Iran, Mexico and even Indonesia. Even if the vote ushers in a period of uncertainty and causes the economy to contract, the impact on oil demand will be too small to register on a global level.

The more serious impact would be if there is contagion to the rest of the European Union, which consumes around 11.1 million bpd, only slightly less than China. But Europe’s consumption has also been flat or falling since 2005 so a slowdown or recession in the rest of the European economy would have only a modest impact on global demand.

The really significant threat comes if the turbulence in financial markets and problems in Europe trigger a widespread “risk-off” flight to safe assets and threaten an economic slowdown in the United States and Asia.

So far, the oil market seems to be betting the threat of significant contagion is low, but that assessment could change very rapidly in the next week as the consequences of Brexit become clearer.

Investment recommendations from Jefferson Trust


  • Overweight in equities;
  • There are positive signs from the global economic cycle, mainly the rebound in the US. The eurozone economy is no longer accelerating, but growth is decent.
  • Regionally, prefer US and Japan.


  • Remain underweight in bonds;
  • Prefer US high-yield bonds.


  1. Bloomberg: “For China Economy, Brexit Seen as a Negative, or an Opportunity”, 2016, <http://www.>;
  2. The Indian Express: “China: Economy to grow 6.6% in 2016, needs policy support in second half, says govt think tank”, 2016, <>;
  3. Abnamro: “FX Flash: Asian FX – no blood bath post Brexit”, 2016, <>;
  4. Commerzbank: “Week in focus”, 2016, < /research_1/week_ in_focus/week_in_focus_2016/160701_Week_In_Focus_EN.pdf>;
  5. Krungsri Research: “Weekly Economic Review”, 2016, <>;
  6. Danskebank: “Weekly Focus”, 2016, <>;
  7. The Huffington Post: “Gold’s Shimmer Is Sign Of Dark Days Ahead”, 2016, <>;
  8. Proactiveinvestors: “Gold price jumps 26% in first half”, 2016,< uk/companies/market_reports/127777/gold-price-jumps-26-in-first-half-127777.html>;
  9. Reuters: “Brexit has limited impact on oil prices so far: Kemp”, 2016, <>.