Post-Brexit: into the great unknown
In the aftermath of the UK’s historic EU referendum, the only thing that is certain is that uncertainty will prevail. At least that’s the opinion of economic analysts the world over. What we have learned from recent days is that markets can swing violently in both directions on unexpected news. While most polls indicated that the momentum had swung firmly in favour of the Remain campaign, in fact by a margin of 51.9% to 48.1% the Brexit vote was signed, sealed and delivered by the British public.
The vast majority of voters were not concerned with the deeper economic ramifications of a vote to divorce from the EU. Rather, they were focused on other issues such as immigration, safety, preservation of British culture, and the cost of financing the EU. The outcome of the vote is now clear, but the social, economic and political ramifications are still largely unknown.
Is a Brexit just part 1 of the story?
A Brexit makes it difficult for the UK to carve out a successful short-term future for itself given the inherent difficulties of the disentanglement process. Even without a Brexit, the UK economy has been on the back foot.
The headwinds to economic growth are now clear for both the UK and the EU. There are several other major geopolitical events due in 2016, including potential US interest rate hikes, the US presidential elections in November, and even the prospect of another Scottish referendum on independence, given that the Scottish public wants to remain in the EU.
There is a mood of anti-European feeling sweeping across Europe. Many countries that are part of the 28-nation bloc are now reconsidering their membership too. With the British pound taking a hammering and the euro also weak, currencies like the greenback and the Japanese yen are being viewed as comparative safe havens.
Will Grexit fears resurface?
When UK politician Nigel Farage addressed the European Parliament and indicated that Britain would not be the last country to leave the EU, many were quietly mulling that possibility.
There are several major upcoming elections taking place in Europe and the US between now and November 8, including general elections in Holland, Germany, France and the US. Anti-European sentiment is strongest in France and Holland, while Germany has its own detractors in the AfD Party. Various reports confirm that anti-Europeanism is strong in France with a majority 61% of respondents disapproving of the EU. The sentiment is more evenly poised in Germany, but much the same was true of the split between Brexiteers and Bremainers.
The potential impact of a break-up of the EU has already been foreshadowed by the ongoing Greek crisis. We’ve seen France and Germany scampering to try and maintain unity by doing virtually anything within their power to keep Greece from falling into bankruptcy and breaking with the EU. That the IMF extended multiple lifelines to Greece is notable, and these were approved by various other regulatory bodies, central banks and leaders of European nations.
The volatility created by the Grexit saga was enough to rock world markets, but it was nothing compared to the potential upheaval of a Brexit. We should mark, however, the resilience of the UK financial markets: in the first couple of days after the EU vote the FTSE 100 plunged alongside the pound, but by Wednesday 29 June all losses had been reversed as the UK financial system reasserted itself with aplomb.
Greece is not the UK and spread betting companies have seen an uptick in activity related to calls for a reconsideration of a Grexit vote. As we have already seen, relations between the UK and the EU are in disarray and souring fast. France, Germany and Italy are already holding meetings without the UK and there are calls for a speedy adoption of Article 50 of the Lisbon Treaty.
There are tensions on either side of the UK political spectrum with the Labour Party and the Conservative Party facing leadership crises. On the one hand Jeremy Corbyn has been steadfast in his determination to remain in place, while five Tory candidates are battling it out for the top spot at Number 10 Downing Street. PM David Cameron has refused to touch the Brexit issue and instead has deferred to his successor, whoever he or she may be in several months’ time.
The financial implications of a Brexit
The financial impact of Britain’s departure from the European Union is an unknown quantity. More important however is the wider effect of a Brexit on other European countries and the impact on the profitability of multinational conglomerates operating in the EU and the UK.
Speculation is rife about the Italian government funnelling €40 billion into its banking system to prevent an economic collapse. Across the Atlantic, there is now an increased probability that the Federal Reserve Bank may move against previous expectations and slash interest rates from their current level of 0.25%-0.50% in an attempt to stimulate economic activity. Recall that the Fed was intending to raise interest rates twice in 2016 and, with Q3 approaching, no rate hikes have come to pass.
Over the short term, analysts believe that the S&P 500 index could rally, and the GBP/USD currency pair could soon be testing the 1.3000 level. In Japan, quantitative easing will likely result in further asset purchases, and the high levels of volatility that we are seeing around the world are starting to seriously worry central banks and governments.
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