Many investors perceived a sign of relief post the Federal Reserve announcement that it kept interest rates unchanged but the fear of Brexit from European Union will put pressure on stock markets globally. The market direction is not clear yet, after US Fed’s decision now all eyes on Brexit which will be a game changer for global markets.
“Brexit” is an abbreviation for exit of British from European Union. It refers to the possibility that Britain will withdraw from the European Union. Britain will hold an in-out referendum on its membership on June 23, 2016 to determine if Britain will stay in the European Union or not. This is most commonly known as the “Brexit” vote, and that term was created by combining the words “Britain” and “exit”. If the U.K. votes to stay in the European Union, things over in Europe will continue on pretty well as they have been. But if the U.K. votes to leave, it will likely throw the entire continent into a state of economic and financial chaos.
Concerns over the future of the UK and the European Union have dominated markets world over of late, as many believe that Britain’s exit can heighten global volatility, impacting India’s capital inflows and in the medium term affecting currency exchange as well. If the global financial markets are affected by the Brexit, Indian markets are unlikely to be insulated. For Indian companies operating in Europe especially in the UK, there could be a fair bit of uncertainty with the pound expected to weaken. The bigger problem will be a likely selloff in emerging markets, which India is part of, mainly on account of a strength in the dollar and aversion to riskier assets.
The European Union referendum is a very important decision for United Kingdom and for Europe. The Federal Reserve has said the UK’s upcoming in-out referendum on its European Union membership was a factor in its decision to leave the federal funds rate unchanged at 0.25-0.50%. While Federal Open Market Committee members’ forecasts continue to suggest two rate hikes of 25 basis points each in 2016.
The FOMC’s statement noted that while the pace of improvement in the labour market had slowed since April, growth in economic activity appeared to have picked up. Although the unemployment rate has declined, job gains have diminished, clearly hinting at the unexpected May non-farm payrolls, which showed that while the unemployment rate fell to 4.7%, only 38,000 jobs were added, sharply lower than expected.
The FOMC also retained its April guidance that it continues to closely monitor global economic and financial developments. The FOMC will next meet on July 26-27, 2016.