30/6/2016 Investors, Don’t Play Footsie With Brexit WSJ This copy is for your personal, noncommercial use only. To order presentationready copies for distribution to your colleagues, clients or customers visit http://www.djreprints.com. http://www.wsj.com/articles/investorsdontplayfootsiewithbrexit1467229607 MARKETS | STREETWISE ’ Investors, Don t Play Footsie With Brexit FTSE 100 is back above last Thursday’s close, but the index is a very poor representation of the U.K. The U.K. voted last week to leave the European Union, setting off a turbulent few days for global markets. Above, London’s skyline. PHOTO: SIMON DAWSON/BLOOMBERG NEWS By JAMES MACKINTOSH June 29, 2016 3:46 p.m. ET Don’t be fooled by the Footsie. The U.K.’s FTSE 100 index is back above last Thursday’s close, just before Britons voted to leave the European Union, and those in favor of Brexit are crowing that everything’s fine. It isn’t. The FTSE 100 is a very poor representation of the U.K. In fact, it’s probably a better representation of the rest of the world than it is of Britain: Only 22% of its http://www.wsj.com/articles/investorsdontplayfootsiewithbrexit1467229607 1/4 30/6/2016 Investors, Don’t Play Footsie With Brexit WSJ companies’ sales come from the U.K., according to Goldman Sachs. Many of the companies don’t even operate in sterling, with more than a third of dividends declared in dollars. These foreign earnings explain why the FTSE is the first of the major global indexes to recover to its level before the Brexit shock. The plummeting value of the pound makes foreign income a lot more valuable in sterling terms, and so it plumps up sterlingdenominated shares. Adjust for the fall in the currency, however, and the shares look grim indeed. A simpler way to see this is to look at the FTSE 250 index of midsize companies, which is more closely linked to the British economy. It is still down almost 8% from Thursday’s close, even after a big bounce in the past two days. Add in the 10% fall in the pound, and the market’s message to Britain is that the future is not bright. BREXIT AND THE MARKETS There are Dow Returns to Positive for the Year as Brexit Worries Ease (http://www.wsj.com/articles/globalmarkets riseasbrexitworriesease1467185655) Who Got Brexit Trade Right? Machines, Not Humans (http://www.wsj.com/articles/inbrexittradingmachine beatsman1467158146) Brexit Signaled 'Buy!' for These U.S. Investors (http://www.wsj.com/articles/brexitsignaledbuyfortheseu sinvestors1467216087) Who's Risky Now? A Boost for Emerging Markets (http://www.wsj.com/articles/whosriskynowabrexit boostforemergingmarkets1467214175) Streetwise: Investors, Don't Play Footsie With Brexit (http://www.wsj.com/articles/investorsdontplayfootsie withbrexit1467229607) The Contrarian Case for a Brexit Boom (http://blogs.wsj.com/moneybeat/2016/06/29/howbrexituncertainty couldproduceabritishboom/) bright spots for global investors, though. Shares elsewhere are a lot less rattled than they were. The S&P 500 has made back slightly over half of what it lost at its worst on Monday, and eurozone shares have made back slightly under half their losses. Crude-oil prices and the dollar’s value against the yen have also made back about half of what they lost. Even better has been the performance of the CBOE Volatility Index, or VIX, often known as Wall Street’s fear gauge, which is back to where it started last week. The VIX measures the cost of using options to protect an equity portfolio, suggesting investors are confident enough to unwind the (expensive) insurance against losses they bought before and just after the U.K. referendum. Investors have not completely abandoned their security blankets, though. Fear still dominates greed in the havens of government bonds and gold, and the biggest beneficiaries of the flight to safety have given back only a small part of their gains. The German 10-year bund yield, which moves inversely to price, stands at minus 0.12%, British gilts still yield less than 1% and the 10-year Treasury offers 1.47%. All signal a bit http://www.wsj.com/articles/investorsdontplayfootsiewithbrexit1467229607 2/4 30/6/2016 Investors, Don’t Play Footsie With Brexit WSJ less fear than at their worst— the Treasury yield approached 1.4% in the hours after the Brexit vote—but are still far from where they stood on Thursday. One reason is that investors expect central banks to rescue them once again. The Bank of England is widely expected to cut interest rates, and perhaps to restart bond-buying. Its base rate isn’t expected to rise back to today’s levels for five years, swaps prices suggest. In the U.S., futures put only a 14% chance on a rate increase by the end of the year, down from 56% on Thursday, according to CME Group calculations. “There’s a sense of comfort that the central banks will underwrite the negotiations [between the U.K. and EU], particularly by providing liquidity,” said Bob Michele, global head of fixed income at J.P. Morgan Asset Management. He worries that investors are complacent about the global recession he predicts. Recession or not, the market message is a lot less positive than the FTSE 100 suggests. Investors believe central banks will prevent a meltdown. But a weaker economy and lower rates hurt banks, whose shares have lagged far behind the rebound of the past two days, and make shares appealing only because everything else is so expensive. With http://www.wsj.com/articles/investorsdontplayfootsiewithbrexit1467229607 3/4 30/6/2016 Investors, Don’t Play Footsie With Brexit WSJ years of British and European political uncertainty to come, investors should be demanding a discount to cover the risk that Brexit creates a wound that even central banks will struggle to heal. Write to James Mackintosh at [email protected] WHAT TO READ NEXT... FASHION PERSONAL TECHNOLOGY: GEOFFREY FOWLER THE SATURDAY ESSAY Brexit: A Very British Revolution CENTRAL BANKS Tennis Style: The Chic Return of Wimbledon White Get Through Airport Customs Faster With This Free App Bank of England Announces Carney Speech Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, noncommercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For nonpersonal use or to order multiple copies, please contact Dow Jones Reprints at 18008430008 or visit www.djreprints.com. http://www.wsj.com/articles/investorsdontplayfootsiewithbrexit1467229607 4/4
© Copyright 2026 Paperzz