Sterling and the FTSE 100 have rebounded today after two days of Brexit losses, but experts suggest the post-referendum market relief might be short-lived.
Sterling showed signs of recovering today as it was up 0.9 per cent against the dollar at $1.3335. However, it remains down 11.2 per cent from its pre-vote level.
The FTSE 100 rose 2.5 per cent today, while the more domestically-focused FTSE 250 rose 2.9 per cent. However, the small and mid cap index is still down 11.2 per cent since Thursday, ahead of the UK voting in the referendum.
Meanwhile, Barclays and Lloyds shares, which fell 11 per cent and 10 per cent respectively on Monday, were up 3.4 per cent and 6.3 per cent today.
Similarly, housebuilders Persimmon and Taylor Wimpey rebounded, after feeling the Brexit hit in the past two days. The stocks were 2.4 per cent and 4.5 per cent higher in today’s trading.
RBC Global Asset Management chief economist Eric Lascelles says markets may have overreacted following the Brexit vote.
He says: “The stock market reaction may eventually prove overblown given that the theoretical long-term economic damage from Brexit is just 2 per cent of UK GDP.”
However, he warns the pound may yet fall further and British yields will remain very low as the Bank of England delivers monetary stimulus.
RBC predicts a 60 per cent prospect of “a shallow” near-term UK recession, which would limit any immediate rebound.
The asset manager says any transmission of British economic weakness to the rest of the world via trade channels should be “limited”.
Hargreaves Lansdown senior analyst Laith Khalaf says: “The activity seen so far is about stocks moving to a new price level where the market is happy. We might get some bounce back but it is still early to say. For now, it is a sentiment and price issue rather than stock specific.”
However, he says companies will continue to issue profit warnings in the aftermath of the vote, such as Carpetright, which warned investors today that Brexit would affect consumer confidence.
Today’s market came despite S&P downgraded the UK’s AAA credit rating and Fitch cutting the UK’s rating following the leave vote.
At the same time, Chancellor George Osborne told the BBC’s Today programme the UK faces further economic instability.
He said: “We are in a prolonged period of economic adjustment in the UK, we are adjusting to life outside the EU and it will not be as economically rosy as life inside the EU.”