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Pound sterling, stocks bounce back from Brexit lows but recession fears remain strong

“The scale of this recovery seems improbable” said David Cheetham of XTB, the online trading firm

Wednesday 29 June 2016 11:39 BST

A trader from BGC, a global brokerage company in London, reacts during trading 24 June, 2016 after Britain voted to leave the European Union (Reuters)

Financial markets have bounced back over the past two days, despite still heightened anxiety about the economic implications of Brexit and a conviction from many economists that the UK is heading into recession.

Sterling was trading at $1.3403 on Wednesday lunchtime, up almost 2 per cent from the low of $1.3148 hit on Monday, which was the lowest value of the pound against the dollar in 31 years.

Sterling off 31 year lows...

Reuters Eikon

Shares were trading higher on Wednesday lunchtime. The FTSE 100 index of London-listed blue chip shares was trading at 6,300, up 2.62 per cent on the day. By Wednesday, it was only 0.55 per cent lower than where the index closed last Thursday, before the referendum result was made public.

FTSE 100 trading higher...

Reuters Eikon

The FTSE 250 – made up of smaller companies that do most of their business here in the UK – was battered by much more than the FTSE 100 in the wake of the Brexit vote, falling 7 per cent both last Friday and on Monday.

But that index too has staged something of a recovery. It was trading at 15,809 on Wednesday lunchtime, up 1.89 per cent on the day and 5.5 per cent higher than its trough on Monday.

FTSE 250 also up...

Reuters Eikon

However, analysts said that the stock market was still fragile, despite recent gains.

“The scale of this recovery seems improbable,” said David Cheetham of XTB, the online trading firm.

“Yes we are seeing a bounce for now, yet markets do not move in a straight line and Friday’s announcement has most certainly struck a more bearish tone that is likely to return before long,” said Joshua Mahoney of the spread betting firm IG.

But economists expect recession

Further, a new survey by Bloomberg has found that a large majority of economists expect the UK economy to fall into a recession for the first time since 2009 now.

Twenty-four of the 34 economists the financial news wire questioned said they expected two-quarters of contracting output.

6 ways Britain leaving the EU will affect you

Show all 6

1/66 ways Britain leaving the EU will affect you

6 ways Britain leaving the EU will affect you

More expensive foreign holidays

The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more

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6 ways Britain leaving the EU will affect you

No immediate change in immigration status

The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay

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6 ways Britain leaving the EU will affect you

Higher inflation

A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum

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6 ways Britain leaving the EU will affect you

Interest rates might rise

The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output

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6 ways Britain leaving the EU will affect you

Did somebody say recession?

Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018

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6 ways Britain leaving the EU will affect you

And we wouldn’t even get our money back

All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget

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A majority also expect the Bank of England governor and fellow policy makers to be forced to stimulate growth by cutting interest rates from the current level of 0.5 per cent in the third quarter.

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