The UK votes to leave the EU, this is a historical moment for the political establishment in the UK and in Europe, however this is also a historical moment for the financial markets. The FX market and the pound is the cleanest way to express a view on the UK, and goodness, it has reflected a massive loss of confidence in the UK this morning.
GBP/USD has had its biggest fall in more than 30 years. The market doesn’t care about the wishes of the British people, it only thinks about the implications for the economy and its view is clear: this is bad news for the country, the economy and the UK’s position in the world order. In other words, for now at least we should batten down the hatches.
Why was Brexit so unexpected?
Financial markets seriously underestimated the possibility of a Brexit; the pound may have fallen in the lead up to the vote, but not to the lows that it has reached today. We expect further falls, however the outlook is extremely uncertain. If David Cameron can remain as Prime Minister for the next few months then he will push for a trigger of article 50, which will start the process of leaving the EU immediately. For those who voted Remain this is a sad day, even for those who voted to Leave, the movements on the financial markets are likely to cause fright.
Those in the financial markets made a mistake by underestimating the potential for Brexit. In hindsight if more focus had been placed on historical polls on the UK’s membership of the EU, and then a Brexit vote may have looked more likely, as a nation we have pretty much consistently expressed a high level of interest in leaving the EU.
The focus to shift to equities
Stocks are expected to open lower later this morning. The financial sector is likely to be hit hard, with some of the bigger banks looking at potential losses of 10% or more. The focus will shift from the pound to stocks at the market open at 0800 BST, already the Nikkei in japan has experienced heavy losses, highlighting the global impact of this decision.
Keep calm; it’s only a Brexit vote…
Amidst all of this panic and gloom in the financial markets, it’s always worth looking on the bright side. We are unlikely to see a move of the magnitude we have just experienced again for some time, 10% plus moves in one day on the financial markets are extremely rare. The massive 1.34- 1.50 range in GBP/USD overnight is also unlikely to be repeated. While we continue to think that Brexit is likely to weigh on risky assets, once the market has recovered from the shock of the victory for the Leave vote then we could see a more ordered downward trend in the pound and other UK assets.
Looking ahead to the next few hours, the market will be searching for direction. Watch out for speeches by Cameron, Boris Johnson and Mark Carney from the Bank of England. The Leave camp may have rubbished economic experts, but after the seismic moves in the financial markets overnight even team Leave will want to here from the UK’s economic experts to find out how they plan to cushion the economic blow from this Brexit vote.
Kathleen Brooks is currently out on maternity leave, but has decided the EU referendum is far too exciting to miss, so she will be available for comments and broadcast slots over the next few weeks. Please contact Alex Nekrassov or David Leslie at New Century Media on: +44 (0)20 7930 8033.