EU Referendum – UK votes Leave

EU Referendum Financial Market Update 24 June 2016

By Will Bradwell
Attivo Investment, part of Attivo Group

Key Highlights:

  • UK votes to leave European Union
  • Record voter turnout of over 80% in some areas
  • Where do we go from here?

A momentous political outcome sees the UK voting 51.9% in favour of leaving the EU. Further to this, Prime Minister David Cameron has resigned (although not immediately) stating that “fresh leadership” will be required to oversee the process of leaving the EU.

Markets were largely positioned for a remain vote winning as in the preceding week both equities and sterling have rallied in anticipation. The initial reaction was seen in foreign exchange markets as the results filtered in overnight, with trading in sterling erasing recent gains and depreciating to its lowest level since 1985 to $1.35.

As equity markets opened, we saw the rapid declines in broader indices, with focussed selling on banks, insurers and companies with significant ties to the continent. Events like this tend to cause an overshoot in asset prices as investors and traders reprice the risk premium required for investing.

As of just before 9am this morning we could see the gravity of the situation as reflected in equity markets:

Bloomberg World Equity Indices

We can see the FTSE100 trading firmly negative but above the key 6000 level and the actual move in UK equities has only erased last week’s rally. The key takeaway from the above is that European stocks have sold off more than in the UK. This leads us to believe that the actual impact of Brexit will be felt more on the continent, as they look towards their own individual votes.

Politically, the shock result has again highlighted the chasm between expert and political opinion and the opinion of the general public. With many key referenda on the horizon, the potential for more “shock” results looks ever more likely.

Going forward, in the short term, the Bank of England and other central banks will stand behind markets to supply liquidity. Central banks in Europe also have many short term lending facilities already set up after the 2008 financial crisis, which should ease lending concerns.

Longer-term monetary policy at this stage is harder to assess. An emergency rate hike to support a weakening sterling is not expected, but the likelihood of further interest rate cuts towards the end of the year has increased. Furthermore, the Prime Minister is yet to invoke article 50 of the Lisbon Treaty, which would officially initiate leaving the EU. Mr Cameron stated that it would be the next Prime Minister who would invoke the treaty, so this effectively increases the time horizon before the UK would leave.

Most importantly, investors must remember that short-term fluctuations in markets are inevitable. Due to their binary outcomes, political events tend to be particularly volatile and this is never a positive for equity markets in the short run. This further emphasises the necessity of having a well managed portfolio of investments, diversified across a range of asset classes and geographies.

Sources: Financial Times, Bloomberg

Attivo Investment is a trading name of Attivo Investment Management Limited which is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 587794). This blog is intended to provide general market commentary and represents the opinion of Attivo Investment only. It is not intended as investment advice or to promote a specific investment. You should seek independent financial advice if you are unsure what action to take in your personal circumstances. This publication is regarded as non-independent research and a marketing communication which means that it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on trading ahead of dissemination.