Sterling slump cushions post-referendum hit to equities

The UK’s surprise vote to leave the EU sent a shockwave through global markets – but parts of the subsequent post-referendum response have been more muted than previously feared. Clearly, sterling was the biggest casualty, plummeting to its lowest since the mid-1980s against the US dollar. But the weaker pound has served to support UK equities, which in sterling terms at least, are actually above their pre-vote levels. Meanwhile, debt markets have so far shrugged off concerns that a vote to leave would see a substantial rise in the risk premium on UK assets. Indeed, despite the UK’s credit rating downgrade, gilt yields have hit record lows, while corporate bond spreads have not widened significantly. A key driver of the falls in both sterling and gilt yields has been the prospect of policy loosening from the Bank of England. Although the MPC held fire in July, markets still expect a near term cut in Bank rate, and then see little prospect of rates returning to 0.5% for several years.