Brexit – too smart to stay
The vote to leave the European Union represents a historic opportunity for the UK. Brexit, in our view, will affect the UK less than the European Union, which somehow has got the shape of an unaccountable, centralized government.
On the “Armageddon” day.
Sterling plunged below a $1.33 mark, the lowest level since 1985. The British currency declined 16% against the Japanese yen and around 7.2% against the euro.
The London Stock Exchange index fell 12.2%, mostly in real estate, banking and retailing industry. The blue chip companies’ index fell 8.7%. Tokyo’s Nikkei 225 was down 7.9%, while Australia’s ASX dropped 3.8%. The S&P 500 was down 3.7%. However, U.S. futures markets pointed to a 0.5% opening gain for the S&P 500 a few days after the EU referendum.
The yen soared 7.2% to ¥98.92 against the dollar. Hong Kong-listed shares of HSBC plunged more than 10%. The Swiss franc strengthened, rising 1.8% against the euro. The gold increased beyond a $1,300 an ounce mark, the highest level in two years.
The 10-year UK Gilt yield fell to a record low of 1.02%, a decline of 35 basis points. The German 10-year Bund yield hit a record low of minus 0.18%.
The UK financial market had recovered from the shock of June 24th by Tuesday, June 28th. The FTSE 100 index closed up 2.64%. Sterling bounced 0.4% against the dollar to $1.3278 and added 0.18% against the euro to €1.2018.
The City, the heart of the UK financial industry, is gradually smoothing the pressure after the EU referendum.
The Bank of England backed up the UK market by injecting funds worth £3.1 billion into the banking sector. Given that the UK is the fifth-largest economy in the world, entering into the bear market confidence would trigger costs for UK businesses.
The UK economy was downgraded by Fitch and S&P on June 27th. It remains open to further analysis how the downgrade would affect the market. Meanwhile, the pound, which touched the lowest point in 31 years against the dollar after the EU referendum, is surprisingly bouncing back. US stocks closed 1.5% higher three days after the referendum. Fears are gradually fading off.
But how will the US Federal Reserve react? A Fed interest rate hike after the June session does not appear on the financial horizon. What is clear is that the market interconnectedness may prove to be more beneficiary for the US than for the EU.
Who is better-off?
- Markets love what they know. But financially, for Britain’s long term perspectives, the cost of Brexit will be lower than benefits.
- Markets don’t like turbulence, because when a currency depreciates it gives a lag to an economy. So this may be a new start for a world financial remodeling.
- Could it be a chance for the US dollar to soar? In times of uncertainty, the market decides who wins and who loses. The United States will likely profit from its lifelong alliance with the UK and its eagerness to boost trade and economic growth.
- EU stocks and shares may feel the cost of Brexit even more than the UK itself.
The United Kingdom
- Potential political instability resulting from British prime minister’s resignation.
- Scotland is set to hold a second independence referendum. As an independent country, Scotland will have the opportunity to apply to join the EU.
- Northern Ireland may hold a referendum to unite with the Republic.
- The number of people coming to work and live in the UK from within the EU is set to be lower, which might harm the competitiveness of the UK economy.
- The UK’s access to the European single market might be significantly restricted.
The European Union
- Reduced monetary and military power of the Union.
- The significance of an EU foreign policy might be diminished. On the other hand, the UK would have more resources to support NATO.
- Political contagion. There is a potential risk that other members would want to leave the EU as well (GREXIT and the fragile economies of Spain, Portugal and Italy). In the Netherlands, France, Hungary and Italy, the success of the Brexit campaign would increase the appeal of Eurosceptic parties even further.
- Brexit would strengthen Russia’s position in Europe.
Political and economic implications will inevitably produce turmoil in the short run. But, Brexit shockwaves may transform into thriving opportunities as the market has the power to regulate itself. British businesses are resilient. They understand what is changing, but they want to see real engagement in reaching the best exit outcome possible.
To conclude, the UK has already decided what kind of country it will be outside the EU. Brexit strongly supports the independent, innovative and profitable UK economy of the modern era we are living in today.
photo: Gwydion M Williams / CC BY 2.0