UK's rating downgraded

Tuesday 05th July 2016 18:53 EDT

On Tuesday 28th June UK financial markets remain volatile in the wake of the Brexit vote, with sterling plunging to a 31-year low against the dollar after Standard & Poor and Fitch downgraded the UK’s credit rating yesterday. S&P downgraded the UK's rating by two notches, from AAA to AA, with a negative outlook and Fitch also downgraded the UK, from AA+ to AA with a negative outlook.

Earlier on in the session Chancellor George Osborne gave a statement before the financial markets opened, his first since the referendum result, the chancellor said the UK was ready to face the future "from a position of strength". He also indicated there would be no immediate emergency Budget. He continued to discuss there would still need to be an "adjustment" in the UK economy, but added it was "perfectly sensible to wait for a new prime minister" before taking any such action.

On Tuesday Day 1 of the EU Economic Summit took place in Brussels. European Union lawmaker’s stated that the UK should exercise article 50 of the Lisbon Treaty as soon as possible. Furthermore, Nigel Farage took the opportunity to speak to its members, saying that he had achieved his ultimate goal and that the referendum’s result was a reaction to Europe’s intention to impose a political union by “stealth” and “deception” and that policy makers are in denial about their failures. In addition, Angela Merkel, in what seems her toughest comment yet, warned the U.K. to have no illusions about life outside the European Union while meeting David Cameroon for his final EU summit following last week’s result. At the same time Jeremy Corbyn loses no confidence vote by 172 to 40 as Labour MPs try to remove him as party leader after his ‘weak’ remain campaign.

The main headline of Friday was Governor of the Bank of England, Mark Carney saying the BoE could ease monetary stimulus over the summer following the shock result of a Brexit. The Monetary policy committee will make their initial assessment of the situation on July 14th after its next scheduled meeting and thus paving the way for the announcement of an interest rate cut at the August meeting, moving the interest rate lower than the current record low of 0.5%.

In Europe German Chancellor Angela Merkel and fellow European leaders kicked off a series of crisis talks, she urged Britain to get on with it. “An extended waiting game” was bad for both sides, she said. Europe’s leaders must decide how to treat Britain in the divorce talks and what steps to take to reinforce confidence in a bloc set to shrink with the departure of its second-biggest economy.

Failure to deliver a strategy could prompt markets to force their hand -- as they did after the collapse of Lehman Brothers Holdings Inc. and Greece’s debacle. Cameron told Parliament on Monday that while Brexit won’t be “plain sailing” as the country adjusts, “Britain is ready to confront what the future holds for us from a position of strength.” Merkel, speaking to reporters in Berlin Monday, said the U.K. has to file official notification of its intention to leave before negotiations can start on its future relationship with what would be a 27-member EU. It is widely expected that the ECB will again expand the current monetary policy in a bid to push inflation to their target level of 2%. Although current expansionary monetary policy measures have proven to have been positive for inflation; it is yet to have the desired effect which has also been exacerbated by the vote for Britain to leave the EU last week.

In the US Final gross domestic product quarter on quarter was released at 1.1% on Tuesday, which is slightly better than forecast at 1.0%. However, undermining the dollar, US money markets are pricing out any chance of the Federal Reserve raising interest rates in the coming months, most likely due to potential impact and systemic ramifications of a Brexit on global financial markets - as mentioned by Fed Chair Janet Yellen at the previous FOMC meeting. Also Oil prices jumped more than 2 percent on Wednesday after the U.S. government reported a larger-than-expected weekly drawdown in crude inventories, adding fuel to an existing rally on fading concerns over Britain's exit from the European Union. Finally The Institute of Supply Managers index climbed for a second straight month in June to its highest level since February 2015, putting the sector on stable footing for the second half of the year.

The indexes for both new orders and production rose in June, and both have been expanding for the past six months. Meanwhile, the exports index hit its highest level since November 2014. But some economists said the Brexit vote could hamper the sector going forward.

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