Brexit: The Immediate Aftermath

Less than 24 hours after Britain voted to leave the European Union (EU), Prime Minister David Cameron resigned, Scotland vowed to conduct a second independence vote and global markets shed over $2 trillion. The next four months will be interesting for he markets as the Conservative party nominates a new leader who will lead Britain through its most critical period since the Second World War.

The immediate aftermath of Brexit wasn’t pretty. No market was spared the toll of the world’s fifth largest economy deciding to break from the world’s biggest economic trade union. Now that Britons have voted to leave the EU by a margin of less than four points, market participants are struggling to piece together what the future has in store.

David Cameron Resigns

It didn’t take long for David Cameron to step down as leader. A key proponent in the fight to keep Britain in the EU, Mr. Cameron had very little chance of surviving the fury of pro-Brexit Tories who were in need of a new direction now that their campaign had succeeded.

“The British people have voted to leave the European Union and their will must be respected,” Mr. Cameron said Friday. “The will of the British people is an instruction that must be delivered.”

Mr. Cameron will stay on as leader until October, giving the Tories enough time to contemplate a new prime minister. However, Cameron will not be involved in formulating Britain’s new trade relationship with the EU, a sign that it may be a while still before the formal divorce proceedings will begin.[1]

Boris Johnson becomes the favourite to replace Cameron

It certainly didn’t take long for Boris Johnson to catapult to the top of the list of replacements for David Cameron. The erratic blond haired Tory MP was one of the key proponents of the Leave vote, and will be strongly considered for prime minister in the coming months. Home secretary Theresa May is currently leading the “Stop Boris” campaign. Given her credentials, she may be considered a more suitable replacement.

Scotland pushes for second independence vote

Scotland, one of the most ardent supporters of remaining in the EU, is strongly considering holding a second independence vote to remain part of the union. First minister Nicola Sturgeon has already invited EU diplomats to Scotland to begin negotiations on how to “protect Scotland’s relationship with the EU.” Scots voted emphatically against leaving the bloc by a vote of 62% to 38%.[2]

Market crisis brews

Brexit unleashed carnage on the financial markets, wiping over $2 trillion from the global exchanges in less than 24 hours.[3] The panic began in the currency markets, where the British pound plunged a mind-blowing 11% against the US dollar to reach its lowest level in 31 years. At its lowest point, the GBP/USD exchange rate had lost over 1,700 pips.

The carnage wasn’t limited to the British pound; stock markets from Tokyo to New York were down sharply, as investors entered into the safety of precious metals and the Japanese yen. Gold prices spiked to 2014 highs, while the Japanese yen reached its highest level since 2013 against the dollar.

The yen’s massive gain through the early hours of Friday forced the Japanese government to hold an emergency press conference to warn against further “one-sided” appreciations in the yen.

Japanese finance minister Taro Aso told markets that the government will “take firm action on the yen if needed.”[4]

In stocks, Japan’s Nikkei 225 index recorded its biggest single-day drop in 16 years. The index plunged nearly 8% to close at 14,952.02. That was the lowest level in 20 months.[5]

European stock markets sold off briskly, with all the major averages reporting sharp declines. The pan-European Stoxx 600 Index closed down nearly 7%. Perhaps surprisingly, losses on the London FTSE 100 Index were limited to 3.2%. Spain’s IBEX plunged 12.4%, while Germany’s DAX closed down 6.8%.[6]

The selloff quickly spread to Wall Street, where the S&P 500 Index plunged 3.6%. The Dow Jones Industrial Average settled down more than 600 points or 3.4%, while the Nasdaq Composite Index declined 4.1%.

The Chicago Board Options Exchange (CBOE) Volatility Index, Wall Street’s preferred measure of market uncertainty, spiked nearly 50% to reach a more than five-month high. The spike was reminiscent of last August’s “Black Monday” market crash that originated in China and spread throughout the globe.

What’s next

A deluge of economic data will descend on the global financial markets this week, although these reports will likely take a backseat to Brexit drama. Britain currently has no timetable on when it will invoke Article 50 of the Lisbon Treaty, let alone when it will officially break from the EU. The longer the uncertainty drags, the more volatile the markets may become. Credit rating agencies Moody’s and Standard & Poor’s have already lowered their outlook on the UK, citing growing instability regarding its future.

[1] Sam Bourgi (June 24, 2016). “Brexit Fury Pushes S&P 500 Futures to 5-Week Lows as David Cameron Announces Resignation.” Economic Calendar.

[2] Severin Carrell and Jennifer Rankin (June 25, 2016). “Nicola Sturgeon to lobby EU members to support Scotland’s remain bid.” The Guardian.

[3] Graeme Weardon and Nick Fletcher (June 24, 2016). “Brexit panic wipes $2 trillion off world markets – as it happened.” The Guardian.

[4] Sam Bourgi (June 24, 2016). “EU Referendum Results Tracker: Britain Votes to Leave EU.” Economic Calendar.

[5] Mariko Iwasaki (June 24, 2016). “Nikkei 225 Clocks Up 16-Year Record Decline.” The Street.

[6] Arjun Kharpal and Katy Barnato (June 24, 2016). “Europe stock plummet to close 7% lower after Brexit vote.” CNBC.

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