Bri­tain may be out, but big prob­lems are loom­ing

Financial Mirror (Cyprus) - - FRONT PAGE -

In the UK, the FTSE 100 was, iron­i­cally, the best­per­form­ing Euro­pean in­dex on the day, given that Brexit anx­i­ety had al­ready been priced into the mar­ket. The FTSE 100 closed at 6,138.69, down 199.41 points or 3.15%. The Ibex 35 proved to be the day’s worst per­form­ing stock mar­ket with de­clines of 12.35% or 1,097.60 points as the in­dex closed at 7,787.70. The French CAC 40 in­dex closed at 4,106.73, down 359.17 points or 8.04%, and the Ger­man DAX closed at 9,557.16, down 6.82% or 699.87 points. Asian mar­kets were pum­meled with the Ja­panese 225 in­dex clos­ing 7.92% lower at 14,952.02, the Hang Seng in­dex shed­ding 2.92% to close at 20,259.13 and the Chi­nese CSI 300 in­dex end­ing 1.29% lower at 3,077.16.

Ac­cord­ing to YouGov stats, the EU ref­er­en­dum pro­duced unique re­sults for each age de­mo­graphic. Peo­ple aged 18-24 voted over­whelm­ingly to re­main in the EU with 75% opt­ing to Bre­main and 25% vot­ing to leave. In the 25-49 age group, 56% of vot­ers pre­ferred to re­main part of the EU, while 44% of vot­ers opted to leave. In the 50-64 age group 44% of Bri­tish vot­ers pre­ferred to Bre­main, while 56% pre­ferred to leave. In the 65+ age group, 39% of vot­ers opted to re­main in the Euro­pean Union, while 61% voted to leave the Euro­pean Union. There were also strik­ing re­gional dif­fer­ences be­tween vot­ing groups, with Lon­don and Scot­land over­whelm­ingly vot­ing to re­main part of the Euro­pean Union, while North­ern Ire­land and all other ar­eas of the UK pre­ferred to leave.

The ques­tion posed to vot­ers at polling sta­tions across the coun­try was the fol­low­ing: should the United King­dom re­main a mem­ber of the Euro­pean Union or leave? It is in­ter­est­ing to point out that the per­for­mance of the GBP was the worst on record in the af­ter­math of the vote – far worse than the de­clines ex­pe­ri­enced by the GBP dur­ing the global fi­nan­cial cri­sis. The ster­ling plum­meted to a 31-year low, record­ing its worst per­for­mance in his­tory. So se­vere was the im­pact on the UK econ­omy that in­vestors across the board adopted a risk-off ap­proach to the ster­ling, the UK econ­omy and eq­uity mar­kets world­wide. In­stead, the fo­cus shifted to the Ja­panese yen as a safe-haven cur­rency and gold bul­lion.

Gold surged to over $1,333 per ounce, up $13.20 on the back of the Brexit. The per­for­mance of gold bul­lion has been re­mark­able over the past year, es­pe­cially dur­ing a time where com­modi­ties mar­kets have been on the re­treat from crude oil to cop­per, iron ore and steel. Over the past year, gold has gained $147.40 per ounce, or 12.57%. Over the past six months, gold has gained $242.80 per ounce or 22.54% (highly bullish), while over the past 30 days, the pre­cious metal has surged by $96.50 per ounce or 7.89%. Gold closed at $1,320 an ounce on the Comex on June 24 and the 24 June spot gold price was $1,315 per ounce.

The GBP/USD dropped to $1.35, as it reached de­clines up­wards of 10%. This is the low­est ex­change rate for the pair since 1985. The pound/dol­lar was trad­ing at $1.05 in Fe­bru­ary 1985, and at $2.10 in Novem­ber 2007, and $1.36 on June 24. This marked the largest drop for the GBP/USD since the global fi­nan­cial cri­sis. The mar­ket is also pric­ing in rate cuts from the big banks and there is likely to be an in­jec­tion of liq­uid­ity as the Bank of England (BoE) may sell off for­eign cur­rency and buy Bri­tish pounds. With the sharp de­cline in the value of the GBP, the BoE governor may move to in­crease in­ter­est rates. How­ever, the neg­a­tive ef­fect of rate hikes will ham­per growth in the UK and make mort­gage re­pay­ments less af­ford­able.

While it is en­tirely pos­si­ble that the out­come of the Brexit vote can be over­turned, it is rather un­likely. What is a lesser­known fact is that the ref­er­en­dum is not bind­ing on the next Prime Min­is­ter of the UK. The next PM may be able to rene­go­ti­ate with the EU and at­tempt a sec­ond vote. How­ever, other Euro­pean Union lead­ers have re­jected this pro­posal. The 17.4 mil­lion peo­ple who voted for a Brexit can­not be ig­nored. Al­ready an es­ti­mated 3 mil­lion peo­ple have put pen to pa­per and called for a sec­ond vote. The prob­lem is that less than 60% of vot­ers were in favour of the leave vote. Ad­di­tion­ally, less than 75% of those el­i­gi­ble to vote ac­tu­ally voted. This in­ter­est­ing set of cir­cum­stances will be dis­re­garded given that the lead­ing politi­cians in the UK have all vowed to recog­nise the out­come of the vote.

The di­vorce pro­ceed­ings from the Euro­pean Union will take some time to ma­te­ri­alise. For starters, the United King­dom will have to in­voke Ar­ti­cle 50 of the Lis­bon Treaty which ini­tialises the breakup. It could take as much as two years for the UK to break all ex­ist­ing re­la­tions with the EU, and at­tempts to re­place them with new treaties. An in­ter­est­ing de­vel­op­ment that has taken place is the an­nounce­ment by Prime Min­is­ter David Cameron that he will be re­sign­ing in Oc­to­ber. He will be leav­ing the is­sue of a Brexit to his suc­ces­sor at that point in time. Note that the Euro­pean Union can­not en­force Ar­ti­cle 50 of the Lis­bon Treaty – that op­tion is only avail­able to the United King­dom.

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