Quarterly Performance Update
Brexit Rocked the Global Markets’ Status Quo
Second Quarter 2016
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Until late June, the second quarter was shaping up to be another period characterized by familiar global economic concerns and investor responses. The June 23 Brexit vote proved to be the quarter’s defining event, triggering a severe two-day global stock market sell-off followed by a strong three-day rally. Meanwhile, the resulting uncertainty was a boon for bonds.
For most of the quarter, the status quo reigned. Global economic growth remained sluggish, corporate earnings growth slowed, oil prices continued to recover, and inflation was muted. Central banks in Europe, Japan, and China maintained accommodative policies, while the Federal Reserve (Fed) kept investors guessing as to the timing of its next move. Then came the surprising Brexit vote. Stock prices and bond yields plunged on fears a U.K. departure from the European Union (EU) would trigger a global recession and threaten the future of the EU. After a severe two-day stock market sell-off, cooler heads prevailed and a stock market rally ensued. Investors concluded the U.K.’s long EU exit strategy may not have as dire an impact as originally feared. Additionally, Brexit uncertainty led to expectations for continued central bank accommodation, which lifted investors’ spirits at quarter-end.
Boosted by gains in May and the three-day rally that closed out June, the S&P 500® Index advanced for the quarter, up +2.46%. But developed markets elsewhere generally declined (in U.S. dollars, which rallied versus most currencies other than the yen), unable to fully recover in the quarter-end buying binge. Weakness in Europe dragged down the MSCI EAFE Index, which declined -1.46%. Meanwhile, emerging markets finished the quarter up +0.66% (MSCI Emerging Markets Index). The limited effect the Brexit decision should have on emerging market economies—combined with likely additional delays in the Fed’s rate normalization plans, which should aid emerging markets—supported the asset class.
As common themes of weak global growth, low inflation, and central bank accommodation continued, global fixed-income returns climbed higher. U.S. Treasury yields declined but remained relatively more attractive than government bond yields elsewhere, while U.S. corporate bonds rallied on investor demand for yield. All other major U.S. bond sectors advanced, too, and the Bloomberg Barclays U.S. Aggregate Bond Index gained +2.21%. Outside the U.S., European bond markets were among the best performers, led by the U.K. The U.S. dollar was mostly stronger against major foreign currencies (with the notable exception of the yen), reducing non-U.S. bond market returns for unhedged U.S. investors.
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Source: Bloomberg Index Services Ltd
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