Update on Brexit

The U.K. has voted to leave the European Union in an unprecedented move. In a somewhat surprising move, the decision to “Brexit” recorded 51.9% of the votes from the overall turnout of 72% of U.K. voters.

This final vote for Brexit did run counter to the advice of many corporate leaders, elected officials and global policy makers that had argued for a “remain” vote prior to the vote.

The final tally of the vote was extremely close, so close that prominent “leave” leaders had conceded defeat in the hours after the polls closed.

What happens now? British Prime Minister David Cameron, who was a “remain” supporter, has announced his resignation effective this fall. The U.K. will now start the legal process of exiting the EU. This process will take a couple of years to complete. These negotiations will be challenging as the EU will be motivated to maintain commercial/economic ties with the U.K. However, there will be equal motivation by the EU not to treat nations that chose to leave the nation bloc too well, to send a message to the remaining nations within the EU.

Until these negotiations are completed, the U.K. remains a member of the EU. Here are some thoughts regarding the financial markets with today’s news:

  • The World’s Central Banks say that they are ready. The Bank of England has pledged additional liquidity if needed. Stateside, the US Fed just completed their annual regulatory stress test on capital reserves of the largest US banks…all banks passed.

  • Stocks may correct. We expect U.K.-based stocks to correct swiftly and potentially drag Europe-based stocks down with them.

  • Bond yields may remain at, or near, historical lows. In-flows to perceived safe-haven credits like U.S. Treasuries and German government bonds (aka “flight to safety”), bid prices up of such bonds and inversely suppress yields.

  • U.K. recession is possible, with concerns about a potential contagion in Europe and Asia. Reduced prospects for domestic companies, capital outflows amid such uncertainty, and partial paralysis of the world’s fifth-largest economy could result in recession. The unknown ramifications of this decision will introduce trepidation in many corners.

  • Financial stocks in particular may face strong headwinds from the decision. Major Banks will now face new negotiations of how to execute cross-border transactions within the EU. With London as a major financial center, this will be a complex task.

As always, we are keeping a watchful eye on all developments on behalf of our clients. If you would like to discuss further, please do not hesitate to contact us.