Britain may be out, but big problems are looming
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.