Finally, the impact of Brexit on the global market is being felt as the Bank of England (BOE) cut interest rates by 25 basis points to a rock-bottom 0.25% for the
first time in more than seven years. The move was highly expected after Britons opted to leave the Europe Union in the June 23 referendum (read: Europe After Brexit: 5 Keys to Investing with ETFs).
Following the poll results, the global market went into a tailspin andthe British currency pound sank to a three-decade low. Several analysts were outright bearish with
Goldman Sachs expecting a "mild recession" in the U.K. by early 2017 hurt by "increased uncertainty and deteriorating terms of trade."
As per Goldman, it will now be tougher to export high-value added services to the European Union. Also, the lingering ambiguity over the definite impact of this go-solo model will put off investments, at least for the time being as it is a threat to the country’s currency pound (read:
UK Votes for Brexit: ETFs Winners & Losers).
Naturally, Bank of England had very few easy options left other than lowering rates to keep the British economy going steadily.
Inside BOE Stimulus
BOE Governor Mark Carney announced that the central bank’s governmentbond purchases program has been raised by GBP 60 billion (about
$78.71 billion), pushing the nation’s total to GBP 435 billion (or about $579 billion).
The BOE is also buying back 10 billion pounds or (about $13 dollar) of corporate bonds under
a new stimulus package. These company bonds will be investment-grade, non-financial in nature. Thanks to this move, yields on corporate bonds will be reduced and the cost of borrowing for companies will come down, as per BOE. Also, BOE will make sure that the banks fully convey this rate-cut effect to borrowers.
Mark Carney also
promised to "take whatever action is needed to achieve its objectives for monetary and financial stability". Market Impact
Needless to say, the move dented on the currency pound. Pound ETF
CurrencyShares British Pound Sterling ETF (FXB) lost about 1.4% on August 4, 2016, reflecting BOE’s easing (read: Best Performing Currency ETFs of 1H16).
This move has invariably lifted shares, though the U.S. market was relatively unmoved bythis move on August 4. Among the top ETFs,
SPY added over 0.1% and about 0.04% after hours, DIA was up about 0.05% and nudged up 0.01% after hours while move higher by about 0.3% and advanced over 0.1% after market close. QQQ Europe ETF Gainers
The real positive impact was felt across the pond, especially in the market in focus. Notably, as pound plunged, the current-hedged U.K. ETFs gained traction on August 4.
Below we highlight a few European ETFs that reacted strongly on the day BOE eased its policy.
Deutsche X-trackers MSCI Spain Hedged Equity ETF – Up 7.19% on August 4 DBSP iShares Currency Hedged MSCI UK – Up 1.74% HEWU DB X-Trackers MSCI United Kingdom Hedged ETF – Up 1.72% DBUK WisdomTree United Kingdom Hedged Equity ETF – Up 1.02% DXPS Europe Stocks Gainers
While several European stocks had reacted positively on August 4, we highlight below a few top-performing U.K. stocks.
Travelport Worldwide Limited TVPT – Up 5.75% Seadrill Partners LLC SDLP – Up 5.40% Aviva plc- ADR AV – Up 5.05% HSBC Holdings Plc ( HSBC Quick Quote HSBC - Free Report) – Up 1.63%
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