18 June 2018
Traders at a global brokerage firm react to news of the Brexit vote as markets opened in London Friday. Photo: Reuters
Traders at a global brokerage firm react to news of the Brexit vote as markets opened in London Friday. Photo: Reuters

Brexit: What now for the markets?

Britons have voted to leave the European Union in a historic referendum, sending shockwaves through financial markets across the world.

According to the final tally, the Leave camp had 51.9 percent of the vote, while the Remain bloc garnered 48.1 percent support.

The news sent the British pound to a 30-year low and triggered a major selloff on equity markets in Asia, including Hong Kong.

Stock markets in Europe opened sharply lower, while US futures were pointing to heavy losses on Wall Street later in the day.

With the worst fears coming true, market observers and analysts say Brexit could have both short and longer-term implications for the markets as well as the global economy and trade.  

“While the vote to leave has immediate market implications, over the longer-term observers will be wary of the impact the vote has on other nationalist and protectionist movements – both in Europe and elsewhere,” said Rick Lacaille, Global Chief Investment Officer, State Street Global Advisors.

“There is the potential for knock on consequences for market-moving issues like trade, labor mobility and foreign investment,” Lacaille said in a note.

In the weeks leading up to the UK vote, many international organizations and central banks had warned that Brexit could pose risks to global growth, trade, foreign investment and financial market stability.

Now there is a danger that all the negative consequences could unfold. 

Christophe Bernard, Chief Economist at Vontobel Asset Management, said the largest impact will be on the UK economy, with uncertainty weighing on investments.

“We expect a 2.5-percent setback for the country’s growth path over the next 24 months with the UK probably undergoing a mild recession,” he said.

Bernard expects the negative impact on continental Europe’s GDP to be around 0.7 percent over two years, but believes that there won’t be much global impact. 

He pointed out that during the Lehman, subprime and eurozone crises, excessive leverage and the resulting fragility of banks were the primary conduits of financial contagion.

But in the case of Brexit, “we are confident that the vulnerability from leverage is nowhere near the scale triggering a severe, long-lasting correction across equity and credit markets,” Bernard said.

The UK vote will however prompt global investors to flock to safe assets.

Central banks in Japan and Switzerland are likely to take some steps to curb excessive appreciation in their currencies, which are deemed safe havens.

The US Federal Reserve, meanwhile, may become more cautious regarding interest-rate hikes. 

Michael Metcalfe, Head of Global Macro Strategy at State Street Global Markets, said the key question now is whether international investors will seek to reduce their underlying holdings of UK assets. 

“We will also be watchful of contagion into European assets, especially the euro,” he said. 

Hamish Pound, Senior Investment Manager at IP Global, said he expects the British government to “move quickly to present a united front and bring certainty and calm to the market.”

“Many foreign property investors will now be looking to capitalize on the short-term forex volatility to purchase competitively priced assets in the UK,” he said.

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