Anyoption analyst Elise Blanford takes an interesting look at last week’s Brexit referendum, and what lies ahead for traders and the financial markets. For more of Elise’s research see the Anyoption blog.
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In a stunning turn of events, the British electorate voted to leave the European Union on Thursday by a margin of 52% to 48% in a heated referendum. The impact was felt across global financial markets after creating ripple effects that are likely to last over the coming months as stunned European officials determine the next steps forward. For the UK, the vote also means changes with Prime Minister David Cameron planning to step down in October so a new leader could navigate the next stages of the exit. While some have hailed the move as a new beginning, others are fearing the worst as the relationship with mainland Europe frays. Moreover, it has emboldened other EU members to contemplate holding their own referendum votes in what will likely be a contentious debate about the merits of the political union that has increasingly lost its relevance.
Brexit Supporters Rejoice
Although polling leading up to the referendum indicated that the “Bremain” camp was ahead by the smallest of margins, the outcome of the vote showed that the British electorate rejected the globalist objectives of the European Union by a wide margin. Citing both the economic and political policies of the European Union, over 71.80% of eligible voters participated, marking the highest level of turnout since 1992. Despite his pleading and appeals, David Cameron was unable to win over the electorate in a move that underlines how the European Union vision is coming apart at the seams. Many voters, especially those impacted by immigration and increasingly burdensome trade regulations, decided that the vision and lack of democratic values embodied by the unelected, technocratic leadership had gone too far and was usurping national sovereignty. However, while many are rejoicing because of the move, the outlook remains fraught with uncertainty.
The outcome was not entirely unpredictable considering the contentious view towards the EU shared by many voters across Europe. Aside from tepid economic performance that has seen member nations struggle to return to growth after the sovereign debt crisis swept through the region, negative views towards open borders and immigration have been cited as key reasons behind the growing animosity towards the political union. For the UK in particular, it’s hard for many voters to understand why they were on the hook for Greek bailouts. Despite the fact that the British did not engage in the same sort of profligate borrowing and spending, the taxpayers were forced to pick up the tab for other’s mistakes. It is akin to opening a bar tab with friends, spending a ton of money, leaving before paying, and hoping that your friends will bail you out by covering the bill.
The Global Ripple
The market reaction was immediately felt as the UK Pound tumbled to the lowest levels in 30-years, creating a panic amongst holders of the currency after marking the worst slide in in the currency according to records dating back to the early 1970s. The volatility in the GBPUSD was particularly high, with the daily range between highs of 1.5018 to lows of 1.3231 marking a -11.89% slide before the pair managed to recover modestly. Total losses for the session following the vote tally were -8.03%, however, this might only be the beginning of losses in the UK currency. For one, the economy might very well tip into recession in the coming months as the uncertainty about the path forward for the economy translates to reduced business investment. After weakening into the vote amid the lack of visibility, UK fundamentals are expected to deteriorate further until the environment improves for business.
Outside of the UK, a general feeling of panic was evident amongst traders as safe haven assets were heavily bid. The kneejerk was felt in risk assets which were quickly sold off, notably equities which plunged on the news, marking one of worst intraday slides over the last year. Moreover, gold prices surged higher, climbing as high as $1362.45 before retreating to $1318.50 per troy ounce. Moreover, the Yen carry-trade continued to unwind, with USDJPY briefly plunging below the key 100.00 psychological level before rebounding to 102.22 to close out the week. However, financial markets were not the only area roiled by the results. More and more, other EU members are questioning their participation and considering holding similar referendums. Over the next 12-months, it is not inconceivable that countries like Greece, the Netherlands, France, and even Italy could consider holding their own referendums on continued EU memberships.
The Outlook
The weekly market reopening is likely to be another bout of historic volatility as financial markets continue to digest the developments. Although longer-term this move might very well help the UK economy restore its competitiveness, short-term turmoil is inevitable. While some investors are eager to play the bounce and catch the falling knife of dipping financial markets, especially the Pound, it will be some time before the dust settles, making it prudent for investors not to act too quickly. While the pain for the Pound may still only be in its early stages, the one untold benefit of the most recent depreciation is export competitiveness which may help bolster the economy over the medium-term. Even though a recession may be just around the corner, democracy prevailed in what will likely be hailed as a watershed moment for voters across Europe.