Increased Volatility Expected in Global Markets Ahead Of Brexit Referendum

On Tuesday, according to the Commerce Department figures, US retail sales rose 0.5% in May, following a 1.3 percent jump the previous month, marking the biggest gain in a year. Sales surged strongly in May as Americans bought automobiles and a range of other goods, signaling that economic growth was gaining momentum despite a significant drop in the number of new jobs created in May. The rise in U.S retail sales has boosted the greenback against its major rivals but any increase in the probability of the Fed increasing rates this summer is highly unlikely at this stage – at least until the next Non-farm Payrolls report that is due on the first Friday of July.

Oil prices dropped around 2% in Tuesday’s trading as supply side data showed a surprise build in US crude inventories last week. According to the American Petroleum Institute (API), US crude stocks in storage rose 1.2 million barrels in the week to June 10 to 536.7 million barrels, compared to market expectations for a decrease of 2.3 million barrels. Brent and West Texas Immediate crude extended their losses through the past week. Both benchmark crude prices lost more than $1 a barrel. Oil prices were also affected by  Brexit concerns. If Britain votes to leave the European Union, investors fear that the EU could dip into a recession, reducing oil demand as a result.

Last week was the week of central banks. The US dollar stayed on the defensive most of the week, after the US Federal Reserve lowered its economic growth forecasts and held back in indicating any aggressive intention towards  rate hikes. After the FOMC policy meeting, the Euro inched up to as high as $1.12635 from the week’s low of around $1.1200. The dollar index eased to 94.583 after the FOMC, from a high of 95.043 touched on Wednesday before the Fed’s policy announcement. The Fed noted that slower economic growth would curb the pace of monetary tightening in the future.

On Thursday, the Japanese central bank stated that it would refrain from providing additional monetary stimulus despite a low inflation rate and weak global growth. The Yen soared broadly after the BOJ’s decision, hitting a 22 month high of 104.06 yen to the dollar and multi-year highs against the euro and sterling.

On the same day, Britain suffered a huge shock after British lawmaker Jo Cox – a supporter of Britain’s continued membership of the EU, was shot dead on the street in northern England. This led to the suspension of campaigning for next week’s referendum on the country’s EU membership. After the killing, all the activities of the “Leave Camp” and “Remain Camp” were postponed.

The coming week is rather light, with few important data releases or events. The world’s attention is focussed on the EU Membership referendum, which is to be held on Thursday. The June 23rd vote could have big effects on the global economy and U.S. stocks. If the British vote to leave the 28-nation bloc, stock markets could fall sharply, and in turn this could push the prices of safe haven assets such as Japanese Yen, Gold and US bonds up.

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