The United Kingdom will leave the EU – How the markets react?
In the historic referendum, people in the UK have voted to leave the European Union. “Brexit” received 51.9% of the votes. The future of the country is now in question, as Scotland and Northern Ireland both voted to “Remain”. First Minister of Scotland Nicola Sturgeon claims that the second Scottish independence referendum is inevitable now. Northern Island also wants to leave the UK and unite with Ireland. There is even a proposal in London, that the town should declare itself as independent and remain in the European Union, as it voted to stay. At the time of writing this article, more than 20,000 people signed this proposal.
What happened on the markets?
Not surprisingly, the markets are in turmoil. The result shocked the investors. As bookies were giving “remain” a high probability of success, prices rallied on the day of the referendum on hopes that “Brexit” would be avoided.
The exchange rate of the British Pound has changed rapidly. As polls predicted a Remain result at first, it increased. When the pro-Leave results came in, it started tumbling. The Pound fell by 6% against the US dollar to $1.40 after having moved above $1.50 on the evening of the referendum. This was the biggest one-day swing in the GBP on record and its lowest level in three decades.
As far as other currencies are concerned, the US dollar fell to 102.44 yen from 104.80 yen while the euro weakened to $1.1052 from $1.1320.
Stock exchanges also reacted quickly: Investors rushed to sell European shares, European and Asian stock markets crashed. Britain’s stock index, the FTSE 100 dropped about 8% but recovered slightly for a 5% loss. The German index decreased 7% and France’s index dropped 9%. The Japanese Nikkei 225 closed down 8%, this is its biggest fall since the global financial crisis in 2008. US stock futures are getting absolutely demolished. Futures for the S&P 500, Dow & Nasdaq are 3-4 % down.
The result of the referendum sent oil price crashing, it dropped about 4%. The price of the “safe heaven” gold increased 8% to its highest in more than two years.
What comes next?
Britain’s decision to leave the EU will launch years of negotiations over trade, business and political links with the EU. The decision will drag the region that is the world’s largest economic bloc, into an era of uncertainty. The concerns about the economic consequences might be toxic to businesses.
As Samuel Tombs, chief economist at Pantheon Macroeconomics said: “UK voters have opted for Brexit. If fully followed through, this will be an act of economic self-harm with global ramifications.”
The Bank of England will try to save the British Pound. They made contingency plans for a “leave” vote and promise to maintain stability. GBP 250 billion liquidity is available for banks. Banks have the most to lose in Britain’s departure from the EU as they do a lot of cross-border activity, which is facilitated in the EU.
Investors will seek for protection in gold and other assets that have lower risk, so you should keep an eye on commodities. Oil analysts agree that the present price decline will hold only over the short term. Commodity investors can trade off volatility driven by chaos in financial markets.