Publication date: 5 July 2016 | Covering: June 2016
Monthly Briefing
- FRESH: UK votes LEAVE in EU referendum June 23 (12 days ago); sterling crashes 10%; global markets fall sharply then partially recover
- Cameron resigns; Conservative leadership contest begins; EU leaders call for swift UK notification under Article 50
- Fed June 14–15: Holds 0.25–0.50%; explicitly cites “uncertainties abroad” including UK referendum
- US May payrolls only 38,000 — shocking miss; unemployment rate falls but for wrong reasons
- Bank of England hints at August easing; global central banks move to provide liquidity
- BOJ easing; Jamaica tourism strong; NHT J$6.5 million ceiling; rates 0, 2, 4 per cent
Brexit: Britain Votes to Leave the European Union
The United Kingdom’s referendum on European Union membership, held on 23 June 2016, produced a result that few financial market participants had positioned for: a majority — 52 per cent to 48 per cent — voted to leave the EU. The LEAVE result sent immediate shockwaves through global financial markets. Sterling, which had been trading around US$1.50 ahead of the vote on the expectation of a Remain victory, fell by more than 10 per cent in hours to below US$1.33, its lowest level since 1985. The FTSE 100 fell sharply before recovering as the weaker pound boosted the earnings of the many internationally-oriented large companies in the index, while European bank stocks suffered more severe and sustained losses. The S&P 500 fell more than 5 per cent over the two days following the vote before stabilising. Prime Minister David Cameron, who had called the referendum and campaigned for Remain, announced his resignation the morning after the result. European leaders made clear they expected Britain to trigger the formal exit mechanism — Article 50 of the Treaty on European Union — promptly, though the incoming UK government showed no inclination to rush. As of this publication, 12 days after the vote, Britain’s future relationship with the EU — its largest trading partner — remains entirely undefined, and the political and economic uncertainty is without modern precedent for a G7 economy.
Federal Reserve Pauses; Brexit a Direct Factor
The Federal Open Market Committee held the federal funds rate at 0.25 to 0.50 per cent at its 14 to 15 June meeting, a decision made two weeks before the Brexit vote but explicitly framed around global uncertainties that the Committee said included “uncertainties abroad” — a clear reference to the approaching UK referendum. The statement’s language was notably more cautious than previous months, and Chair Yellen’s press conference highlighted the international risks to the US economic outlook. The updated Summary of Economic Projections reduced the median number of rate increases projected for 2016 from four to two, then in the post-Brexit environment to effectively one, as the event sent a chilling effect through the Fed’s rate-hike timetable. US May payrolls, released on 3 June, had been a severe miss: only 38,000 jobs were added, against expectations of around 160,000, providing an additional reason for caution even before Brexit. The June payrolls data — to be released 8 July — will be watched intensely to determine whether May was an aberration.
Global Financial Stability Response
In the immediate aftermath of the Brexit vote, the world’s major central banks moved rapidly to reassure markets and provide liquidity. The Bank of England Governor Mark Carney appeared on the morning of 24 June to announce that the Bank had taken all necessary steps to ensure financial stability and had £250 billion in liquidity available. The ECB, the Fed, the Bank of Japan, and the Swiss National Bank issued a coordinated statement on 24 June pledging to take all necessary steps to support financial stability. The G7 also held an emergency call. These pre-planned and coordinated responses helped to limit the duration and severity of the market disruption, though the underlying economic and political uncertainty stemming from Brexit remained a deep and unresolved source of concern. For emerging market and Caribbean economies, including Jamaica, the post-Brexit environment of renewed risk aversion, currency pressure, and uncertainty about global growth represented a meaningful headwind for external financing conditions.
Jamaica Mortgage Market in June
Jamaica’s mortgage market absorbed the Brexit shock with reasonable stability, in part because the BOJ’s domestic monetary policy framework and the IMF programme’s macroeconomic stabilisation had reduced the direct vulnerability of the Jamaican financial system to global volatility spikes. The NHT’s J$6.5 million individual ceiling and tiered rates of 0, 2, and 4 per cent continued to anchor the affordable housing finance market. The mid-year period traditionally sees an uptick in property market activity as the summer diaspora season begins, and this year’s activity was supported by record tourism arrivals and strong remittance inflows despite the global turbulence. The depreciation of sterling following Brexit was a potential negative for Jamaicans remitting from the UK, but the US dollar and Canadian dollar channels remained strong.
Looking Ahead
The immediate priority for global markets is understanding the pace and shape of Britain’s exit process. Who leads the Conservative Party and becomes Prime Minister will be known in the coming weeks. The Fed’s July 26 to 27 meeting will take place in the post-Brexit environment, and any rate increase in 2016 is now contingent on evidence that the global and US economic outlook has stabilised. Bank of England Governor Carney has strongly signalled that an easing package — potentially including a rate cut and additional QE — is likely in August. For Jamaica, the peak of the hurricane season through August and September, combined with the continued strength of the tourism season, will define the near-term economic trajectory. The mortgage market is expected to remain broadly stable, supported by domestic easing and the NHT’s continuing programme activity.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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