UK shocks friend and foe: ‘Leave’ wins

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Voting GB EU

The British have taken both their friends and their foes by surprise by handing victory to the Leave camp. No-one saw this coming, as even the bookies had been predicting a comfortable majority for Bremain and the financial markets were no longer factoring in a Brexit in the week. The vote will not just rock the financial markets; it is likely to have far-reaching political consequences as disunity within Europe spreads. The United Kingdom itself will be on the lookout for a new prime minister: David Cameron resigned this morning.

Central banks across the world have said they will do what it takes to provide liquidity to keep financial markets trading as normally as possible. Ben Steinebach Ben Steinebach Head of Investment Strategy

Flight to safety, equity markets hit

Investors have been fleeing for safety into German and Swiss government bonds, as well as currencies such as the Japanese yen and the US dollar. Meanwhile, gold has added over 4% and equity prices have taken a beating. In Asia, the Nikkei closed around 8% lower, but China’s markets were able to stem the losses to around 3%. Europe’s indices recorded falls averaging 6-7%, with the financial services industries hardest hit.

Central banks to try and limit the damage

Central banks across the world have said they will do what it takes to provide liquidity to keep financial markets trading as normally as possible, and we expect currency interventions and potentially also interest rate cuts in the UK. We also believe that actions will be coordinated to keep the damage under control, with the US Federal Reserve now unlikely to move to raise rates, which should benefit the emerging markets.

What next?

Volatility is bound to persist in the days ahead as the markets come to terms with this unexpected turn of events, while politicians will also have to step up to contain any contagion. Over the weekend an emergency meeting of EU leaders was called to help prevent any damage, and we assume that both central bankers and political leaders will aim for close collaboration and an orderly process. This should help to restore calm to the markets after the initial shock, and might open up opportunities for investors. Although recession might well hit the UK, we expect the rest of the world to continue to show modest economic growth. This should combine with relatively low interest rates and solid central bank support to provide opportunities in equities.

Full diary

The weekend will see Spain go to the polls, prompted by the inability of the countries’ parties to agree a new coalition government after the election of 20 December 2015. In the wake of the UK Brexit vote, the risks of contagion will be at the top of everyone’s mind. Other news demanding attention in the week ahead will be PMI data from the US, Europe and China. The US and UK will release economic growth data and Europe has a range of confidence indicators slated for release. Japan will publish its Tankan survey and provide more clarity on the country’s tough economic environment.

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