Fed and other central banks must stand ready to deal with Brexit fallout

IN the final stretch towards the June 23 British referendum on whether to remain in the European Union or to leave, global equity markets are taking a pummelling. Late last week, sovereign bonds enjoyed their biggest rally since the last market carnage in February, with 10-year US Treasuries falling to 1.64 per cent, German 10-year bunds touching close to zero and Japanese government bond hitting a new low, just below zero. Stocks in Asia and Europe continued to fall yesterday.

The threat of "Brexit" is by no means the only dark cloud looming over the markets. The experiment with negative interest rates in the eurozone and Japan is widely seen as having delivered, if anything, perverse results, with no palpable impact on growth and a strengthening (rather than the intended weakening) of the yen and the euro, contributing to deflationary pressures.

Oil prices - which have also become something of a bellwether for the markets - had briefly come off their February lows, hitting US$50 a barrel last week, only to start sliding back down - a trend, which if it continues, could be another negative for the markets.