2 March 2016

It's all about Europe

With a deal now sealed and the battle lines being drawn for June’s referendum, Europe looks like being the focus of attention for the foreseeable future.


Not that this is helping investor sentiment. The biggest casualty has been the pound which, having flirted with an exchange rate of £1/1.43€, making the euro worth just 70p towards the end of last year, fell steadily as the year progressed. At one point the euro became worth nearly 80p, so for those hoping for cheap holidays on the continent, you might be better to wait to buy your euros until after the outcome of the vote is known.

The problem, as always, is the uncertainty this referendum has created. There was a similar shudder through the sterling market over the Scottish independence referendum, and in that case the likely outcome looked a lot clearer ahead of the vote. The case for staying in or leaving is altogether more finely drawn, with political parties, notably the Conservatives, deeply divided on which route is best and big political beasts arguing the toss on both sides.

Share markets have been less affected, though last week did see the FTSE 100 Share Index shed nearly 2.5%, while the S&P 500, America’s principal benchmark index, fell even more – not that the result is likely to mean much on the other side of the Atlantic. There it is the Presidential election nominees’ battle that is commanding attention. Along with the possible ramifications of a “Brexit”, the outcome of this particular race could well impinge on investor sentiment.

Gold, on the other hand, is once again attracting attention as a safe haven investment, though this is probably more a consequence of the continuing geo-political issues that threaten world stability. Indeed, oil has been trading a little higher, generally supporting a calmer feel for investors. While this is undoubtedly welcome, it is worth noting that the last Governor of the Bank of England, Mervyn King, has been warning of an impending financial crisis.

While he has concerns over Europe – where else –he is also worried that the banking system has not been overhauled sufficiently to prevent another 2008 style collapse – something Sir John Vickers, the chairman of the independent commission on banking, has raised recently. This is hardly the sort of issue likely to encourage investors to buy into weakness, but it does, perhaps, underscore the fact that opinion is currently divided on a number of issues, staying in or leaving the European Union being just one.

We could be forgiven for forgetting that China has tended to dominate investment thinking recently, even if it does appear to have dropped out of the headlines in the last week or two. Recently, though, a cut in their reserve bank rate helped to cheer investors and moderate earlier losses in Europe. Given that deflation in the single currency zone seems to be creeping ever closer, any good news is welcome.

With so much going on over the next few weeks – and a variety of opinions being expressed – it would be foolish to expect markets to steady completely. We do, though, appear to be weathering recent storms quite well. Investors can take some comfort from that.


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