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A British flag flutters in front of a window in London, Britain, June 24, 2016 after Britain voted to leave the European Union in the EU BREXIT referendum.REINHARD KRAUSE


The MSCI All-Country World index is up 1.2 per cent and trading near its highest valuation in a year. The S&P 500 index gained 2.9 per cent and reached record levels amid speculation that the Federal Reserve will be patient in raising interest rates. Closer to ground zero, the Stoxx Europe 600 index lost 1.7 per cent, just a hair worse than the benchmark's median four-week return over the past year.

Britain's FTSE 100 index got a lift from the tumbling pound, recovering from its post-Brexit loss in just four days. It's now in a bull market and has risen 6.2 per cent since the vote, the developed world's best performance in that period.

That is, of course, only for investments in pounds. In dollar terms, the FTSE 100 has fallen 6 per cent. That's bad news for the foreigners who the Office for National Statistics says own more than half of the British stock market.

As for smaller companies that are more dependent on the economy in Britain, where business activity has shrunk at its fastest pace since the last recession seven years ago, the FTSE 250 index of mid-caps is down 13 per cent in dollar terms.

Over in the United States, options traders have shaken off their Brexit blues and turned bullish amid aggressive.


The Brexit vote spurred investors to opt for the relative safety of sovereign debt, driving yields in Japan, the United States and even Britain to record lows. Fixed-income securities were also boosted by bets that central banks' easy-money policies would get even easier, to shield their economies from the Brexit fallout.

Until last year, the Bank of England was expected to follow the Fed in tightening. Now it's seen as all but certain to cut interest rates on Aug. 4 from a record low 0.5 per cent – futures put the chances at 87 per cent – and possibly even expanding its asset-purchase program for the first time in four years.

Gilts were the big winners, returning about 5 per cent in the past month.

In the corporate-bond market, Jack Daniel's whisky distiller Brown-Forman Corp. was among companies that braved Europe's debt markets after a dip in sales around the British vote as issuance quickly rebounded.

Companies were lured back by borrowing costs that fell to a record low as the European Central Bank pledged to backstop the region's economy with more stimulus if necessary. The average yield investors demand to hold the euro debt of investment-grade companies declined to 0.75 per cent on July 21. For speculative-grade firms, the yield slid to 4.2 per cent, the least in more than a year.


The pound was, of course, the biggest Brexit loser. Since the vote, it's the world's worst-performing major currency against the U.S. dollar, falling 12 per cent, a far cry from even coup-battered Turkish lira's 7 per cent, the second worst. The pound touched a 31-year low of $1.2798 (U.S.) on July 6 before bouncing back and then getting hammered again by weak economic data released on Friday.

The pound's plunge may boost import costs, prompting bets that inflation will rise in Britain. The cost to protect against price increases exceeding 2 per cent in two years is near the two-year high of 229 basis points hit this month and almost double the one-year average of 124.

Emerging markets

Brexit flipped perceptions of global political risk upside-down, as Europe's fracture made countries such as Russia and Brazil look relatively stable and safe. As a result, emerging-market bonds and stocks benefited from investors fleeing near-zero and negative interest rates in Europe in search of bigger returns.

Developing world stocks have added $662-billion in value since the June 23 vote, while $10.8-billion rushed into bonds of emerging-market countries, including one week in which inflows were the biggest on record. Yield chasers have even explored the fringe of the emerging world. Dollar bonds of El Salvador and Mongolia handed investors returns of at least 9 per cent, the most among 67 peers in a Bloomberg index.

"The combination of high yield and improving growth momentum has worked very well for emerging-market debt and equity," said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague. He favours hard-currency debt in developing countries and stocks in India, Mexico, Colombia and Thailand.


Canada 'waiting and ready' to talk with U.K.

Finance Minister Bill Morneau said Canada is "waiting and ready" to begin talks with U.K. officials on deepening trade ties in the wake of the country's vote last month to leave the European Union.

While Canada is focused on concluding its already negotiated free trade agreement with the European Union, it's prepared to begin separate discussions with the U.K. at any time, Morneau said in an interview with Bloomberg in Chengdu, China.

"We're waiting and ready to have those discussions recognizing we may not be very first on the list of issues," said Morneau, who was in China to attend a meeting of Group of 20 officials. "From our standpoint, Britain is a very important trading partner and will continue to be so."

Canadian officials, including Morneau, have expressed optimism the Brexit vote won't impede efforts to conclude the Comprehensive Economic and Trade Agreement, or CETA, which was initially agreed to in principle in October 2013. That's even after the EU put its landmark free-trade accord with Canada on a slow track for approval, increasing the risk of a veto.

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