Market Reaction to Brexit

Spend Matters welcomes this guest post from Avneet K Deol, of Mintec.

Over the last few weeks, global economic news has been dominated by the U.K.’s decision to leave the E.U. on June 23. In this article, we take a look at how global markets have reacted to the Brexit vote.

Britain’s economy is the fifth largest in the world and is the second largest in the E.U. Destabilisation of that level is likely to impact other nations, of which there are already signs: The U.S. Federal Reserve left interest rates unchanged ahead of the referendum due to the possibility of a Brexit.

The key concerns are that without access to the E.U.’s open markets, Britain could potentially lose trade and investments. Furthermore, the E.U. is likely to impose restrictive regulations in a bid to prevent other member states from leaving in a Brexit domino effect. Losing access to migrant workers could also lead to lower productivity, slower economic growth and decline in job opportunities.

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The largest impact of the E.U. referendum was to currencies, with the pound plunging to the lowest level in 31 years against the U.S. dollar, while the euro also weakened following the results, due to concerns over the aftermath of Britain’s decision.

An impact to stock markets seems to have been largely short-lived. On June 24, when the referendum results were announced, the FTSE 100 began the day by falling over 8%. The Euro Stoxx 600 was off 7%, while the S&P500 index posted its largest one day loss since August, down 3.6%.

By mid-July, most major indices have recovered their losses, with U.K.’s FTSE 100 even reaching a 10-month high. However, the majority of FTSE 100 companies are multinational organizations that generate a large amount of their income overseas. When the pound weakens, this income is worth more in the U.K., which boosts shares. For a better indication of the U.K. economy it is useful to look at the FTSE 250, which tracks the biggest companies in the U.K. The FTSE 250 fell 13% in the two days following the Brexit decision. Although it has recovered since then, it remains below levels seen before the referendum.

Demand for safe-haven investments rose sharply in the weeks following Brexit, strengthening the value of government bonds, gold and the Japanese currency.

In a bid to reassure markets, Mark Carney, the governor of the Bank of England, announced that the bank would provide an extra £250 billion of funds to banks or may cut interest rates mid-July, if required to soften the slowdown in growth caused by Brexit.

The process of U.K.’s exit from the E.U. is expected to take two or more years if both sides agree to extend talks. However, with Britain being the first member to exit the E.U. it is this uncertainty that is a cause of immediate concern. There are some early indications that business and consumer confidence have already been affected.

Following the weeks of political uncertainty, the new prime minister is now in place in the U.K. There have been an initial positive response from the markets, but as Britain is preparing to lead the country through the uncharted territory of leaving the E.U., undoubtedly Brexit will continue to generate global economic headlines for months if not years to come.

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