Implications Of The Britain Vote To Leave The EU, What It Means For Markets, The Pound Falls Up To 10% Against Major Currencies.

Note at the time of writing the result of the UK Referendum has not yet been formally called.

The facts,as discussed on 3AW yesterday with Tom Elliott the effect of the Brexit vote:

The pound is down between 8% and 10% on all major currencies.

Our share market in Australia is down more than 3% but still above 5000 points.  

Our dollar has not changed against the US dollar but 8% higher against the pound.  The Dow Jones futures are down 6%.

We think that the market shock / media hyperbole will peak in the next few trading sessions / over the weekend and that investors will have time to consider where best to accumulate exposure to quality stocks on the pullback or hold. The commodity sector and miners are certainly the worst hit in our opinion. 

The real damage is to the UK, to economic growth, to their currency, there property and equity market will be volatile and more importantly for them leaving them to negotiate new  trade and immigration regimes as a non member of the EU..

The damage would not be determined by Brexit itself but by the kind of deal that Britain does with the EU after it leaves. Britain is the second largest economy in Europe and it is strong enough to get almost any kind of deal that it wants.

It is a good day to remember some old market mantras: Don’t panic. Remember that Investors are humans and often abandon rational thought in difficult markets. Most do the wrong thing when the market falls. The smartest keep calm and capitalise on the right situations.

Market impacts

The problem with the Leave scenario for markets is two-fold; 1) the structural changes to the UK’s interactions Europe and the extent of their real impact (or not) could potentially take years to determine; 2) a Brexit could also add fuel to the rise in popularist political movements in Continental Europe which may lead to other nations pushing to leave the EU.  (Spain for example) Both of these give rise to higher uncertainty, which as we know financial markets are likely to discount. However central governments stand ready to support the financial system (as they’ve done many times) offering a floor in market sentiment at some point. (E.g. A Brexit lends weight to the Fed further delaying US rate rises).

The “Leave” vote will prolong the recent period of uncertainty until the market then comes to properly understand the issues of forward policy making  Market uncertainty could extend for a couple of months, prolonging recent risk-off moves (Bonds up, US Dollar up, Gold up, Equities down, Sterling down). During this time we’d expect the BoE, ECB and the Fed to step in with additional liquidity to absorb and eventually dampen the volatility / swings in markets. When forward policy is clearer, we’d expect Bonds, Equities, Sterling and Gold etc to begin reverting / recovering.