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Can Central Banks Save Us From Brexit Woes?

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It's an ugly morning in markets as Brexit uncertainty is compounded by the apparent implosion of the U.K.'s main parliamentary parties. For investors, there was better news in Spain as Prime Minister Rajoy emerged as the big winner in yesterday's election, but that has not been enough to move the dial on the global Brexit selloff. 


Political turmoil

The fallout from the U.K. vote to leave the European Union is certainly not confined to financial markets. Over the weekend, the government of Prime Minister David Cameron, who has already announced that he will resign in the coming months, appeared rudderless while Labour, the main opposition party, took the opportunity to turn on itself. Finance Minister George Osborne attempted to reassure markets this morning that the government will be able to deal with the whatever comes next, but investors do not seem to be willing to listen. 

Central banks

The Bank of England's response to the Brexit vote has been to pledge an additional 250 billion pounds ($330 billion) to support the financial system while also promising that additional measures are available, which bank analysts view as an indication that a rate cut may be coming. For the governor of the bank, Mark Carney, the politics of post-Brexit Britain may mean that his position is at risk. He was accused of favoring the 'remain' side ahead of the vote by the leaders of the 'leave' campaign and may now face one of those critics as Prime Minister following David Cameron's resignation. David Blanchflower, a former BOE policy maker now at Dartmouth College in New Hampshire, told Bloomberg Television that "Carney’s position is clearly in some question.” The European Central Bank and the Federal Reserve have both said they are willing to provide liquidity should the need arise. Market implied odds of the next Fed rate move now show it most likely to hold rates unchanged until February 2017 at least. 

Bonds, commodities

The world of negative-yielding sovereign bonds continues to expand as investors rush to safety, while U.K. 10-year Gilt yields dropped below 1 percent for the first time ever this morning. It is a different story in sterling-denominated corporate debt, as a market that was already under pressure from the ECB's eurobond buying program is set to take another blow from the Brexit vote.The commodity market, which was hit in the initial reaction to the referendum outcome, could prove more resilient as the U.K.'s once powerful position in everything from tea to copper has long since passed

Spanish election

Caretaker Prime Minister Mariano Rajoy was the surprise big winner in yesterday's Spanish general election, with his People's Party winning 137 seats in the 350-strong Spanish chamber, up from 123 in December's vote. While the path to the 176-seat majority remains complicated, Rajoy has promised to deliver a government within one month. Spanish stocks and bonds are outperforming this morning.

What we've been reading 

This is what's caught our eye over the weekend.

Before it's here, it's on the Bloomberg Terminal.