The outcome of Thursday’s historic EU referendum, in which
nearly 52% of UK voters opted to leave the European Union, stunned markets
globally in its immediate aftermath on Friday morning. The vote counting began
with a surprisingly sizeable lead for Leave at over 60% of voters in
Sunderland, and the pro-Brexit camp never looked back as it continued to
maintain a modest advantage throughout the vote tally, even after the
expectedly pro-Remain London votes came in.
Prior
to the voting results being known, most of Thursday and the previous several
days were characterized by the financial markets’ strong conviction that Remain
would prevail. Despite an extremely tight contest in pre-vote polling, this was
partly due to betting odds-makers predicting an overwhelmingly high probability
of a Remain victory. To say that financial markets were caught off-guard when
the Leave camp began early in the vote count to show its strength would be an
understatement. After the referendum’s outcome, when UK Prime Minister David
Cameron announced his upcoming resignation as a result, the market impact was
even more pronounced.
As
it became increasingly clear during the vote count that a Brexit outcome might
actually occur, markets experienced exceptionally high volatility, most notably
in the currency markets. In particular, the British pound and Japanese yen
underwent vast and rapid swings throughout the course of the vote count. As
expected, the British pound was most heavily pressured due to the
widely-projected, negative economic implications of a Brexit, with GBP/USD
plunging at one point to more than a 30-year low of 1.3226 in the aftermath of
the referendum outcome. Also as expected, the Japanese yen surged strongly due
to its status as a safe haven currency in times of market turmoil, with USD/JPY
dropping to a new multi-year low just below 99.00.
When
the pound and yen were pitted against each other in the form of GBP/JPY, the
results were even more dramatic. The currency pair dropped by a massive 20 big
figures to a new 3½-year low just above 133.00. Finally, although the euro rose
sharply against the even more heavily-pressured pound, the common currency had
its own fair share of trouble after the referendum results. EUR/USD plunged to
a low of 109.10 before paring much of its losses on Friday morning.
The
market impact was not limited to currencies, however, as gold spiked due to its
status as a safe haven asset and global equities experienced large initial
drops on the news. By Friday afternoon in Europe, most of these reactions had
been cut back significantly, but exceptional pressure on sterling continued to
define the financial markets.
Now
that the news is out and the immediate market reactions have occurred, what
might be next with respect to the Brexit outcome? The process of separation
between the UK and European Union is expected to be long and drawn-out, likely
taking at least a couple of years with many negotiations, both political and
economic, occurring in the process. On the near-term horizon, however, Brexit
implications will probably be felt relatively quickly and on a global basis.
The obvious question now is which EU countries might be next in holding their
own referenda for leaving the European Union. If this becomes an increasing
occurrence amongst current EU countries, the viability of both the European
Union and the Eurozone (and in turn, the euro currency) could become even more
questionable.
But
even more pressing at the moment is Brexit’s potential impact on major central
banks. Bank of England Governor Mark Carney made a televised appearance on
Friday morning stating that the central bank “will not hesitate to take
measures as required” with respect to the extreme volatility in the pound as a
result of the referendum. The other major currency most affected by Brexit, as
noted, has been the Japanese yen. There have been numerous warnings in the
recent past and the immediate run-up to the referendum from Japanese officials
touting Japan’s readiness and willingness to intervene should the yen become
too strong or experience exceptional volatility. If the yen spike continues,
given that the USD/JPY dropped well below 100.00 at one point on Friday, this
could very well fulfill the prerequisites for an impending currency
intervention by Japan in attempts to stem the yen’s rise.
Finally,
the Brexit outcome is very likely also to have a substantial impact on the US
Federal Reserve. Since the results of the referendum have been announced, the
implied probability of a Fed rate hike any time this year has plunged
dramatically, with some market participants now even speculating on a possible
rate cut. If this actually comes to pass, the Fed will have finally relented by
joining other major central banks on the prevailing global trend of monetary
easing.
As
the Brexit outcome continues to be digested and through the next few
weeks, the markets should continue to exhibit lingering volatility as the
trends going forward are being determined. For both the pound and euro, this
could mean persistent pressure for the time being, particularly for the euro if
other EU countries begin to take the UK’s lead. Safe haven assets like gold,
the yen and the Swiss franc, should also remain supported as markets fluctuate
and find direction. The noted prospect of Japanese (and possibly Swiss)
intervention, however, could potentially help to limit the yen’s gains if it
occurs. As for the US dollar, if Brexit affects the Fed’s prior monetary stance
as much as might be expected, the greenback could also come under significant
pressure going forward.