Chinese sovereign bonds rally on Brexit vote, industrial profit growth slows

The Chinese sovereign bonds strengthened Monday as Britain voted to leave the European Union in a referendum after 43 years of membership in the bloc on Friday. Also, slow growth in China's industrial profits spurred demand for safe-haven assets.

The yield on the benchmark 10-year bonds which moves inversely to its price moved lower 4-1/2 basis points to 2.903 percent.

On Friday, just over 72 percent of the UK population, the highest participation rate in a country-wide poll since 1992 have participated in a historic referendum to abandon the EU project for good, highly legitimising the 51.9 percent vs 48.1 percent in favour of leaving, result. This outcome flies in the face of the high implied probabilities, based on bookie’s betting odds, of staying in, is at odds with several of the final (pre-referendum) opinion poll findings, and indeed goes against the grain of the number of self-confessed EU-sceptics who are said to have reluctantly moved towards the ‘Stay’ camp.

But the decision has been taken. Although the physical departure from the EU will not occur for at least a few years -  article 50 of the Lisbon Treaty must first be invoked - domestically, the UK faces a very uncertain l-t economic future, and a sea-change in the political landscape. PM Cameron is to step down within three months and is likely to take along with him, Chancellor Osborne. The face of the next Conservative ‘administration’ that will be responsible for negotiating the country’s divorce and orderly exit terms from the EU will be altered, as the centre of gravity of the Tory government moves decisively further to the right.

Moreover, we foresee that the UK’s relationship with ex-EU partners will be significantly altered. Beyond that, in view of Scotland’s 62 percent vote in favour of remaining in the EU, the SNP will offer another referendum on independence to Scotland, on the basis of Scotland having been yanked out of the EU against the will of its people. The next time around the Scottish people will likely vote in favour of secession.

In addition, China's industrial profits rose by 3.7 percent y/y in May, slowing from April's pace and adding to concerns that the world's second-largest economy may be losing some momentum, from 4.2 percent y/y growth in April.

Lastly, China’s Permier Li said that the China will implement prudent monetary policy in a flexible way; there is room for authorities to implement proactive fiscal policy.

Meanwhile, China sets the USD/CNY reference rate at 6.6375, 0.91 percent weaker than 6.5776 last Friday and the Shanghai Composite (SSEC) rose 1.24 percent to 2,889.74.