Post-Referendum Confusion Continues

Sterling has been sold beyond the panic low seen when it became clear that UK voters were choosing to leave the EU though nearly every economists warned of at least serious short- to medium-term negative economic implications.  

The UK is in disarray.  We remain struck by what appears to be the lack of a game plan by the leaders of the Brexit movement.  It is not clear to many outsiders, how Cameron can submit his resignation, in the face of a popular vote of no-confidence, and retain his post for at least three months while the Tory Party figures out his successor. In the meantime, Cameron has backtracked from his initial plans to invoke Article 50 that formally begin the divorce proceedings.  

The Labour Party is in no position to fill the vacuum created by the implosion of the Tories. Labour leader Corbyn does not have the support from wide swathes of the party and its donors. Over the weekend, at least a couple of shadow ministers for forced out and more than a dozen other Labour members resigned.  

There is increased speculation that the Bank of England will cut interest rates and resume its QE operations. The UK 10-year gilt yield is off 12 bp to 95 bp.It has fallen 28 bp since the referendum.Although the FTSE 100 is off a 1.3%, financials continue to bleed, falling more than 5% near midday in London.The Dow Jones Stoxx 600 is about 2% lower, while the financial sector is down more than 4%. 

Most other major currencies are trading broadly lower, but above the initial lows seen before the weekend. The Japanese yen is the notable exception, though there is not much momentum. The dollar has been largely confined to a half a yen range on either side of JPY102. Weekend official meetings did not produce fresh concrete action, but additional fiscal and monetary measures seem likely in the period ahead.  Anticipation of this may have helped the Nikkei rally 2.4%.  

The risks of intervention have increased, the threshold has not been met. While the capital markets are volatile, they do not appear disorderly.  The first line of defense will be the swap lines with the Federal Reserve that were used extensively during the Great Financial Crisis. The focus is on the access to dollar funding rather than the foreign exchange price.