Brexit impact not over yet: National Australia Bank

Even though global markets have recovered from the initial impact of the Brexit vote, markets will have to be wary of risks going ahead, according to Nick Parsons, Head of Research, UK and Europe, National Australia Bank.

Last week’s rally in the markets was an outcome of the British Parliament’s ratification of Brexit, Parsons said. There is decisive steer for potential candidates to replace outgoing Prime Minister David Cameron, who resigned in the aftermath of the Brexit vote, which supported the rally, he said.Below is the verbatim transcript of Nick Parson’s interview to Nisha Poddar on CNBC-TV18.Q: What do you make of this entire fall in the markets that we are seeing; just when we thought Brexit fears are behind us there is a lot of tremor in the global markets? A: I think the most surprising move of all was actually the extent of the rally towards the backend of last week because Brexit is a global shock; it is not just a little local affair for the UK nor indeed is it just something that only concerns the United Kingdom and Europe. There are a lot of companies globally who will be examining their supply chains, who will be asking themselves questions over future capital investment and a lot of companies who will be deciding that right now the safest thing to do is not commit any new business and that dampening of business confidence is understandably going to feed fairly quickly into lower levels of activity. Yes, it will be felt more in the UK and Europe than elsewhere but at the moment the sense is that nobody is really going to be immune from this. Q: Now do you see the way pound is behaving, 31-year lows, it is a very worrying fact and how much of a correction do you see going forward especially for the European markets? Earlier you had predicted 10 percent more correction after the knee-jerk reaction to Brexit. A: We think the pound has got further to go and probably another 5-7 cents from current levels which will take us somewhere into mid 1.20’s against the US dollar. However, there are several warning bells ringing at the moment. One of them comes from that price action in the pound; the other one comes the price action in the Japanese yen which traditionally is a safe haven in times of turbulence. However, the other thing we are watching very closely is what is happening in global bond markets. Now, we have seen that US yields are down today. If you look at 10-year US yields, we are down at 1.37 which is close to the lowest they have been in history. However, let me throw this statistic out for your viewers, if you look at Swiss government bonds, you will see that every bond that the Swiss government has ever issued that is currently not yet been redeemed, is now trading on negative yields. Now, the longest dated Swiss government bond doesn’t mature until 2066. There is a 50 year bond out there from the Swiss government which today trades on a negative yield. Now, that I think is the clearest sign of the nervousness that investors globally have got right now.Watch video for more...