Breaking Down Brexit

It was a day to remember on Thursday last week when Britain voted to leave the European Union by a 51.9% to 48.1% margin.

An event that caused a butterfly effect of sorts, a total meltdown or rather a mass sell off of financial markets worldwide. In my office in Mumbai, I sat and watched the events unfold. As soon as the news got in, Indian equity markets took a huge hit with the Sensex losing 950 points while the Nifty shed 330 points intra-day respectively. Being a stock broker for the last 2 years this was the second time I was witnessing such a meltdown with the Chinese yuan devaluation scare of 2015 being the first.
The London stock market suffered steep losses at the open, but recovered to finish down 199 points or minus 3.1%. Bank stocks suffered badly, while some housebuilders shed a quarter of their value amid forecasts of a UK recession.

The day became a historic one at 8.15am London time when the British prime minister resigned. The Bank of England, the European Central Bank and the Federal Reserve all promised to flood market with new liquidity if needed, to prevent the Brexit shock turning into a new financial crisis.

But that wasn’t enough to stop France’s CAC sliding by 8%, or Wall Street suffering its biggest one-day fall in 10 months.

 

These were the bulletins at 10am in the UK

– The pound slumps 10% to trade at $1.3322, the lowest since 1985

– FTSE 100 futures down 8.4% at 5,760, indicated biggest loss since 2008

– Nikkei 225 index, down 7.6%,  suspended for trade as circuit breakers kick in

– U.S. stock futures slump, with Dow Jones Industrial Average futures down 3.8%

– Gold rallies 4.9% to $1,324.80

– Oil tanks 5.7% to $47.24 a barrel

 

Asia got hit hard too, while results from across the UK had flooded in, with Japan’s Nikkei index experiencing its biggest fall since the Fukushima disaster of 2011.

Although India did recover to only losing 181 points on the Nifty and 605 points on the Sensex by closing bell, however, worldwide the picture remained grim.

Here is  a snapshot of  financial markets worldwide on Brexit day.

brexit

For Forex traders the bloodbath continued with the Sterling Pound suffered a jaw-dropping plunge in the early hours of Friday in London, from $1.50 against the US dollar to just $1.33. It closed at $1.368. A 8.8% drop in value.

2.1 Trillion $ was wiped out of stock markets globally.

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That was the news. Now I’m certain that a lot of you are confused and have a lot of questions about Brexit – What happens next and what does it mean for Britain? I will try to explain what happened in the simplest way possible.

First lets look at the main points of contention

The Brexit campaign covered many issues including widespread dissatisfaction with the EU regulations by those who wanted Britain to leave. However, it ended up focusing mainly on sovereignty and immigration. Those in favour of Brexit argued that the free movement of Europeans to live and work across the 28 EU member states had led to an influx of migrants. Those in opposed to leaving argued that immigrants contribute more in taxes than they cost in welfare or public services and had brought Britain the fourth lowest unemployment rate in the EU, at just 5%. Moreover, Britons who favored remaining in the EU reinforced that only about 13% of British acts of parliament were to implement EU laws and many EU regulations do not affect the United Kingdom.

Who wanted to remain and who wanted to leave?

The business class and many politicians including the majority of the 650 members of Parliament favored remaining in Europe. London voted 60% to 40% to stay. Scotland voted strongly to remain, as well, as it has benefited from EU programs. But most other parts of England that are economically weaker voted to leave. Around 58% of voters older than 65 wanted to leave, while 75% of those younger than 24 voted to remain. The sheer magnitude of the volume of votes from the economically weaker parts of England was marginally enough to decide the result.

brexit 3

What does this mean for Britain?

It will take upto two years for Britain to completely exit the EU; membership doesn’t change right away. The ramifications of the vote were immediately felt on the political and financial market front with British Prime Minister David Cameron, who called the referendum and supported Britain’s remaining in Europe, resigned. The ruling conservative party must now choose another leader. Meanwhile as I pointed out earlier the Pound fell to it’s lowest level since 1985. The ratings agency Standard and Poor’s removed Britain’s AAA economic rating, meaning it will have to pay higher borrowing costs.

What happens next?

Nobody knows to be certain because this is the first time a country has voted to leave the EU. The terms of Britain’s leaving have to be negotiated with the remaining EU member states, and the issues will be complicated.  It should all take two years.

What needs to be negotiated?

Britain will try to maintain access to the European trade market on similar terms as other member states which means the free flow of goods and services. However, France and Germany have warned that the U.K. cannot leave and retain the advantages of membership. If there isn’t any agreement at the end of two years of negotiations with the EU, the U.K. will be subject to World Trade Organization rules, which means trade tariffs on all goods sold to the EU. Although WTO tariffs having fallen considerably this will still hamper business in the UK.

Can Britain change its mind?

Technically, referendums are not legally binding in Britain so the Parliament could ignore the result of the vote. But that is very unlikely, another possibility is that a general election could be called with the main issue being whether the newly elected Parliament should reconsider the decision. This would be opposed by all those who voted for leaving.

If Britain does leave the EU can it rejoin?

Not very easily. There is no way back into the EU unless all the member nations vote for it which considering them being perturbed with Britain leaving in the first place is very unlikely.

How might the vote affect the makeup of the United Kingdom and Europe?

In Scotland leaders suggested they could push for another referendum on the country’s independence from Britain, just two years after Scots voted in September 2014 to remain in the U.K. Leaving Britain might be a way for Scotland to stay in the EU.
In Ireland there are talks of Northern Ireland being united with the Republic Of Ireland to create one united country though that is seemingly unlikely. The success of the Brexit campaign may trigger other EU nations such as France and Italy to consider doing the same which could harm the EU as a whole.

It is  certainly a step backward for Britain, a nation which has for 300 years benefited and avoided large scale economic disaster because of it’s plundering of other countries wealth through colonisation through the years. The exact repercussions of this decision remain to be seen but it is quite a grim prospect going forward for the U.K.

 

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2 thoughts on “Breaking Down Brexit

  1. Very comprehensive analysis. Do you think there are any advantages for the UK to be outside the union? From reports coming out today, it appears this is going to be a wake up call for the EU, which in my opinion has long been needed. The UK will definitely need time to get stable again, even though markets seem to be rallying.
    Have actually been writing about Brexit on my blog too.

    Like

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