24 Jun 2016 BREXIT
The latest reminder of how divided we are around the world and how poorly our political systems understand and have adapted comes this morning as British citizens voted yesterday 52% to 48% to leave the European Union. The referendum itself was the result of a risky campaign pledge Prime Minister David Cameron made in order to gain re-election. He calculated the referendum was the only way he could placate anti-EU Conservatives in his party, while holding off the growing threat that the U.K Independence Party might fracture his majority in Parliament.
Markets immediately reacted to the surprise. According to Bloomberg, the pound plunged as much as 11% to $1.37, the weakest level since 1985, before recovering somewhat. In other markets oil prices fell more than 6%, gold, considered a safe haven in uncertain times, jumped as much as 8%. The FTSE 100 (England) fell 8% and the DAX (Germany) was off 6%. The Stoxx Europe 600 Index sank 6.6% as of 9:50 a.m. in London, heading for its biggest decline since 2008.
At home, as of this writing the S&P is down 2.5%, the Total US Stock Market down 2.6% and All World ex-US down 6.4%. Our shock absorbing 7-10 Year US Treasury Index is up 1.44%, helping our portfolios ride out this ‘bump’ more smoothly than the news suggests.
U.K. Prime Minister David Cameron this morning announced that he would resign, effective within three months. Boris Johnson, the former mayor of London, will likely be his replacement, but as we know, nothing in politics these days is certain.
The vote re-exposes longstanding fissures both in the UK and in Europe. There are calls within Northern Ireland and Scotland to seek their own political paths forward. Bloomberg reports Scottish First Minister Nicola Sturgeon saying that her parliament should have the right to hold another vote “if Scotland faces the prospect of being taken out of Europe, effectively against our will.” Sinn Fein called for a referendum to reunify Northern Ireland and the Republic of Ireland. Nationalist politicians in France, Italy and The Netherlands are calling for their countries to leave the EU, emboldened by the British people’s rejection of their political leaders’ calls to remain.
The questions investors will be grappling with in the weeks and months to come will be both economic and political as to the continuing viability of the European Union. Will it be able to withstand the rising tide of no-confidence?
Initial economic fallout will come from banks in Greece, Italy, and Spain. They are largely propped up by confidence in a strong EU. If the tide turns negative, the potential for a domino effect grows, particularly if the European Central Bank and EU leaders are not able to offset real concerns with measures that instill sufficient economic and political confidence.
The impact on global and US trade will be measurable, but businesses and traders will adapt, economically speaking. The larger issue is what BREXIT says about our growing divisions as a people; locally, nationally, and globally.
As always, please give us a call if you want to talk about the uncertainty surrounding this decision and how it might impact your plan.