Whats next for the markets after Brexit?
The timing of the Brexit vote and outcome was fortunate in the sense that it gave the financial markets a full weekend to digest the news and gather their bearings. Now that markets have resumed trading in a new week, many investors are wondering what fallout from the Brexit vote they can expect to see in the coming weeks and months.
As far as the financial markets are concerned, look for them to remain volatile for some time to come. Stock indexes are likely to fall as equity investors recalibrate their expectations after the run-up before the Brexit vote. Certain sectors may suffer more than others, in particular the banking sector as Treasury yields slide and interest rates follow suit. A potential market rebound wouldnt be surprising at some point, when well-capitalized investors seek out bargains in the stock, currency or commodities markets. Moreover, gold prices may pull back after the recent strong rally to safety when some traders look to take profits from these gains.
Its likely that market uncertainty will prevail in the near term as the dust from the Brexit referendum continues to settle. Were already seeing some unexpected post-Brexit reactions ripple through the political world in the U.K., with leadership changes affecting both major political parties. This instability is likely to test market psychology in the coming weeks.
Plus, investors should remain wary of a potential unexpected, unforeseen disruption to the financial markets. Trading was reported to be stressful and hectic but relatively smooth on Friday following the Brexit vote. That is a positive sign of the resiliency of the financial markets. Should something out of the blue occur, it will probably rattle the already shaky nerves of investors. Events in the next few weeks will test how much resiliency markets really have and if they can continue to operate efficiently.
Political uncertainty in the U.K. and the European Union will likely not abate anytime soon. The Brexit result may motivate citizens with strong anti-establishment views in other countries to push for their own referendums on sovereignty and the future of political unions. In the U.K. itself, there has been plenty of political chatter in the wake of the Brexit vote of Scotland and Northern Ireland breaking with Britain and forging their own ties with the European Union. The map of voting results shows near overwhelming support for Remain among citizens in Scotland and Northern Ireland compared to England and Wales. (See map at right.) Outside of the U.K., strong anti-E.U. opposition already exists and may look to Brexit for inspiration for staging their own referendums. (Could a Frexit be around the corner for France?)
On the economic front, the effects of Brexit should land more heavily in the U.K., where economists are already predicting a significant slowdown in growth just stemming from the Brexit vote itself, before any changes actually occur with treaties or trade agreements. Ripples of an economic slowdown could wash up on E.U. shores, where Britain represents over 17% of the Eurozones gross domestic product. And because the U.K. is the fifth largest global economy, a drop in economic activity there could reach beyond Europe too, into the U.S. and Asia, although the effects arent likely to be as strong.
How Brexit will really affect economic growth will likely remain uncertain for many months, because no one knows when Britain will actually start the formal process of E.U. withdrawal and what the outcomes of the new treaties and trade agreements will be. Differences in the expected timing of the exit are already apparent between Britain, where the process may be delayed until new leadership is in place, and the rest of Europe, where leaders from Germany and France have expressed their wishes for an earlier start to the U.K. formal withdrawal.
It will be interesting to watch the reaction to Brexit in other European countries and listen to how their leaders publicly discuss the future of relations with Britain. Many of these governments are facing elections of their own in the near future and fielding the passions of their sovereignty-minded citizens who have been energized by events in the U.K. These leaders may have an interest in making Britains abandonment of the European Union look difficult, and therefore an unattractive alternative to voters considering their own take on Brexit.
With all of this pervasive volatility and uncertainty, safe haven assets will continue to have an appeal to investors looking to downplay risk and protect their accumulated wealth.