The Brexit Shakes Global
Markets
A worldwide selloff occurs after the
United Kingdom votes to leave the European Union.
Provided by Ed Fulbright, CPA, CGMA,
PFS
A wave of anxiety hit Wall Street Friday
morning. Thursday night, the United
Kingdom elected to become the first nation state to leave the European Union. The
“Brexit” can potentially be finalized as soon as the summer of 2018.1
Voters in England, Scotland, Wales, and Northern Ireland were posed a
simple question: “Should the United Kingdom remain a member of the European
Union or leave the European Union?” Seventy-two percent of the U.K. electorate
went to the polls to answer the question, and in the final tally, Leave beat
Remain 51.9% to 48.1%.2,3
The vote shocked investors worldwide. The threat of a Brexit was supposed to have decreased.
As late as Thursday, key opinion surveys showed the Remain camp ahead of the
Leave camp – but at 10:40pm EST Thursday, the BBC called the outcome and projected
Leave would win.4
Why did Leave triumph? The leaders of the Leave campaign hammered home that E.U.
membership was a drag on the U.K. economy. They criticized E.U. regulations
that impeded business growth. They felt that
the U.K. should no longer contribute billions of pounds per year to the E.U.
budget. They had concerns over E.U. immigration laws, which permit free
movement of people among E.U. nations without visas.1
Financial markets were immediately
impacted. The pound fell almost 11%
Thursday night to a 31-year low, and the benchmark U.K. equities exchange, the
FTSE 100, slipped 5% after initially diving about 8%. Germany’s DAX exchange
and France’s CAC-40 exchange respectively incurred losses of 7% and 9%. In
Tokyo, the Nikkei 225 closed nearly 8% lower, taking its largest one-day slide
since 2008.5
Stateside, S&P 500 and Nasdaq Composite futures declined more than
5% overnight; that triggered the Chicago Mercantile Exchange’s circuit breaker,
briefly interrupting trading. The Chicago Board Options Exchange Volatility
Index, or CBOE VIX, approached 24 after midnight. The price of WTI crude fell
more than $2 in the pre-dawn hours.5,6
At the opening bell Friday, the Dow Jones
Industrial Average was down 408 points. The
Nasdaq shed 186 points at the open; the S&P, 37 points.7
Fortunately, the first trading day after the Brexit referendum was a
Friday, giving Wall Street a pause to absorb the news further over the weekend.
How could the Brexit impact investors &
markets going forward? Consider its
near-term ripple effect, which could be substantial.
The Brexit could deal a devastating blow to both the United Kingdom and
the European Union. Depending on which measurements you use, the E.U.
collectively represents either the first or third largest economy in the world.
In terms of international trade, its import and export activity surpasses that
of China (and that of the United States).2
An analysis by the U.K.'s Treasury argued that the country would be
left “permanently poorer” by the Brexit, with less tax revenue and lower
per-capita GDP and productivity. The Brexit certainly hurt the U.K.’s major
trading partners, which include China, India, Japan, and the United States.
Some Chinese and American companies have established operations in the U.K.
specifically to take advantage of its E.U. membership and the free trade
corridors it opens. With the U.K. exiting the E.U., the profits of those firms
may be reduced – and the U.K. will have to quickly negotiate new trade deals
with other nations. The most recently available European Commission data shows
that in 2014, U.S. direct investment in the E.U. topped €1.8 trillion (roughly
$2 trillion), with a slightly greater amount flowing back to the U.S.2
You could also see a sustained flight to the franc, the yen, and the
dollar in the coming weeks. The stronger the dollar becomes, the weaker the
demand for American exports.
Investors
should hang on through the turbulence. The Brexit is a historic and unsettling moment, but
losses on Wall Street should be less severe than those happening overseas.
Retirement savers should not mistake this disruption of market equilibrium for
the state of the market going forward. A
year, a month, or even a week from now, Wall Street may gain back all that was
lost in the Brexit vote’s aftermath. It has recovered from many events more
dramatic than this.
Please call Ed Fulbright at 919-354-0368
or edf@moneyful.com if you have questions about your specific
situation.
This material was prepared by MarketingPro, Inc., and does not
necessarily represent the views of the presenting party, nor their affiliates. This
information has been derived from sources believed to be accurate. Please note
- investing involves risk, and past performance is no guarantee of future
results. The publisher is not engaged in rendering legal, accounting or other
professional services. If assistance is needed, the reader is advised to engage
the services of a competent professional. This information should not be
construed as investment, tax or legal advice and may not be relied on for the
purpose of avoiding any Federal tax penalty. This is neither a solicitation nor
recommendation to purchase or sell any investment or insurance product or
service, and should not be relied upon as such. All indices are unmanaged and
are not illustrative of any particular investment.
Citations.
1 - bbc.com/news/uk-politics-32810887
[6/23/16]
2 - cnbc.com/2016/06/21/uk-brexit-what-you-need-to-need-to-know.html
[6/24/16]
3 - bbc.com/news/politics/E.U._referendum/results [6/23/16]
4 - bbc.com/news/live/uk-politics-36570120
[6/23/16]
5 - nytimes.com/aponline/2016/06/24/world/asia/ap-financial-markets.html
[6/24/16]
6 - rE.U.ters.com/article/us-usa-stocks-idUSKCN0Z918E
[6/24/16]
7 - marketwatch.com/story/us-stocks-open-sharply-lower-joining-global-post-brexit-selloff-2016-06-24
[6/24/16]
