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The global market repricing unleashed after the Brexit vote still has plenty of road to run as the UK disentangles itself from the EU, according to the researchers at the Bank of England.
In blog post on ‘Brexit-related shocks on assets prices’ BoE researchers found the market impact of the referendum spilled over from UK assets to related economies and still has not fully reversed nine months after the vote.
“The effects of these shocks have only partially unwound and still pose a drag on UK and global yields and equity prices,” wrote authors Marek Raczko, Mo Wazzi and Wen Yan.
UK bond yields were 60 basis points (0.6 percentage points) lower at the end of 2016 than the start of the year. This “decline was predominantly driven by negative UK shocks”, said the researchers.
The move in the gilts market was helped along by the BoE, which unleashed a new round of gilt purchases following the Leave vote, pushing down UK borrowing costs by driving up demand. (Yields fall when a bond’s price rises).
“The drop in UK yields would have been larger if it had not been for US shocks driving yields up”, said the blog.
UK stocks meanwhile dropped sharply in the fortnight after the vote, falling by 17 per cent as investors fled British stocks and digested the new political terrain.
Still, equity markets soon recovered their footing, with the BoE’s researchers finding that “around two-thirds of the initial negative shock to UK-equities reversed around the BoE monetary policy package”.