Markets Settle As The Great British Freakout Takes A Break

After two trading days of carnage following the Brexit vote, stock markets rose around the world on Tuesday.

The U.K. may be headed for a recession next year, and the Federal Reserve has likely abandoned plans to raise interest rates this year due to the instability unleashed by the U.K. referendum vote. But financial markets across the world ended their two-day Brexit freakout, with major stock indices rising slightly across the world.

In the U.S., the S&P 500 rose 1.8% and the Dow Jones Industrial Average rose by just over 1.5%. Both indices are still down about 3% since the referendum vote.

The FTSE-100, an index of large U.K.-listed companies, rose 2.5%, cutting its losses to a little more than 3% since the vote; the FTSE 250, which includes medium sized companies that mostly do business in the U.K. and are more exposed to the local economy, rose just over 3.5% but is still down by 10.5% since the vote.

The British pound even managed to rise slightly, after the biggest single day drop in its history on Friday, when it hit a 31-year low against the U.S. dollar. It rose by about 1% on Tuesday, hitting 1.34 pounds to the dollar, which is still lower than it has been in decades.

While markets are no longer tumbling, investors believe the pain for the British companies will likely still be severe: British banking giants like Barclays and RBS only rose by a couple of percentage points today after double-digit falls on Friday and Monday, while discount airline EasyJet, which lost a third of its value in the two days after the vote, rose by about 5% today.

The mild relief spread across the English Channel — the Stoxx 600, a broad European index, rose 2.57%, but is still 8.5% below its pre-Brexit vote levels. The Nikkei 225, a Japanese index that fell 8% following the Brexit vote, is still more than 5% below its Thursday levels, although it gently rose in the past two days.

And gold prices — which generally rise when investors are feeling panicky — fell slightly on Tuesday, after rising more than 5% in the two days following the vote.

"It is still early, of course, but at this point financial markets seem to be handling
'Brexit' reasonably well," a team of Nomura analysts said in a note today.

So as the markets calm, onlookers are in general agreement on a worsened economic outlook for the U.K. and its neighbors. Goldman Sachs dropped 2.75 percentage points off their projection for the U.K's economic growth in 2017, but said they "cannot dismiss" a bigger drop "if it proves difficult for Britain to negotiate an arrangement with the EU that ensures a reasonable degree of market access."

The Goldman analysts note that the U.S. stock markets took the downturn in mortgage-backed securities and the failure of Bear Stearns hedge funds in the summer of 2007 that are now seen as the beginning of the financial crisis "in its stride and made further all-time highs."

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