With the UK’s referendum concluding in the unexpected result of voting to leave the EU, market sentiment has reacted negatively this morning. Ahead of the referendum, both UK equities and sterling had risen as expectations of a ‘remain’ vote increased. However, the initial reaction as results filtered through overnight was sterling weakness, with the UK currency dropping around 7.5% versus the dollar.
As the results unfolded, and the prospect of Brexit began to appear more probable, Asian equity markets fell sharply. UK shares initially fell heavily, with the FTSE100 dropping by 7% before recovering most of its losses. Meanwhile, gold surged and the yen – widely viewed as a “safe-haven” currency – strengthened; gilt prices rose and yields fell.
Following the result, Governor of the Bank of England (BoE) Mark Carney stressed the resilience of the UK’s financial system and maintained that there would be “no initial change” in the way that Britons travel or trade, although he warned that some market and economic volatility should be expected. The Confederation of British Industry (CBI) called on the Government and BoE to shore up confidence and economic stability, but observed that “rushed decisions” would not be appropriate. The British Chambers of Commerce (BCC) also urged the Government and BoE to take “swift, decisive, and coordinated action” to stabilise markets if necessary.
Looking ahead, as the UK starts the convoluted process of detaching itself from Europe, sentiment is likely to be adversely affected by concerns over the future. The BCC warned that “confidence, investment, hiring and growth” are all likely to be undermined by a protracted period of uncertainty. Meanwhile, political instability has been exacerbated by the news that Prime Minister David Cameron will step down by October. Furthermore, following Scotland’s “remain” vote, the referendum’s result will reignite debate over the question of Scotland’s independence. There will also be questions over how soon the UK will invoke Article 50, which sets out the – as yet unprecedented – procedure for the withdrawal of a member state from the EU.
At this stage there are still many variables and uncertainty is likely to keep sentiment subdued in the short term. Over the coming weeks, both political risk and the economic uncertainty will be subject to greater focus, particularly with major elections coming up in the US, Germany and Spain.
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