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How Would Global Central Banks Respond to a Post Brexit Panic?

How Would Global Central Banks Respond to a Post Brexit Panic?

John Kicklighter, Chief Strategist

Talking Points:

  • Just this past week, the FOMC, BoJ and SNB made reference to their concern over and focus on the Brexit vote
  • In current market conditions of extended risk exposure and low liquidity, a crisis is easy to detonate
  • Individual intervention efforts to shore up local markets could be easily overwhelmed by global risk aversion

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

Nearly every major policy authority the world over has mentioned its concern over the UK's EU Referendum June 23rd. Their interest is not in the political outcome but rather the potential that the vote could tip a fragile global financial system into a scramble for safety that quickly descends into panic and liquidity gaps. A split between the UK and European Union carries certain unknowns for the former's economy but is more troublingly an existential risks to the latter. Yet, the short-term concern for global policymakers is borne out of underlying conditions.

We have discussed the market's general vulnerability to systemic shock for some time. A tremendous reach for yield necessitated by the very central bank accommodation aimed at encouraging growth has taxed the groups' resources, thinned liquidity and made investors more circumspect about stability. In such circumstances, an appropriately influential and global spark can set off a broad deleveraging effort.

Recognizing the risk they face, central banks are no doubt considering their options. So far, stated solutions to a panicked market have ranged from the Fed's suggestion that it could revert to its easing bearing up to the BoJ threatening direct intervention to shore up liquidity and stabilize its exchange rate. Pursuing individual solutions would be a more targeted approach; but against a global wave of fear, it would very likely overwhelm such efforts. And, any one region that fails to shore up its end can dangerously amplify the systemic risk aversion sentiment. A coordinated effort therefore is a likely solution being floated amongst officials as an extreme response. We discuss the Brexit's global implications and the probably responses from officials in this weekend Strategy Video.

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