In a stunning decision that is reverberating around the world, the people of the United Kingdom have decided to leave the European Union, the 28 member bloc and market of some 500 million that has its roots in the aftermath of the Second World War.
Even more shocking perhaps is the margin of victory, the “Leave” campaign winning by 52 percent over the “Remain” side’s 48 percent. More than 17.4 million British people voted in the June 23rd referendum to exit the EU, compared to 16.1 million who cast ballots to stay the course.
Financial Markets Plunge, Gold Hits 26 Month High
Usually a reliable predictor of political events, the stock markets advanced solidly throughout voting day while August gold fell on speculation that Britons would vote to stay in the EU. Final opinion polls had shown strong trends toward a Remain victory.
This changed abruptly early in the morning when the outcome became clear. The price of gold spiked (by over $50 per ounce), to its highest level since April of 2014. Silver also rose steeply.
Conversely, the British pound saw one of its largest-ever one-day drops – more than 10% in six hours to reach its lowest level since 1985, as investors turned to the dollar and the yen. The speed with which the currency fell is considered to be unprecedented and observers are noting that it has very likely not seen the bottom. The Bank of England immediately set aside 250 billion pounds ($344 million) for potential stability measures, and it is expected to raise interest rates to protect the fragile pound.
British banks began taking a beating on the Asian markets, seeing losses in the 8 – 9% range in Hong Kong. Japan’s Nikkei 225 index (which saw brief recovery heading into referendum day) was down more than 7 percent the morning after. The Vix index of volatility shot up over 15%.
In London, the FTSE 100 plunged more than 8 percent upon opening, taking 120 billion pounds of value off Britain’s 100 biggest companies; in Frankfurt, the losses were 8%, in Paris 10%.
Political, Financial Uncertainty
British Prime Minister David Cameron, the author of the referendum on EU membership, immediately announced his resignation, to take effect once his Conservative Party chooses a successor. Scotland, which narrowly voted last year to stay in the United Kingdom, backed the Remain side by a strong 62% return and nationalists there may see this as an opportunity to rekindle their independence goals.
Institutions such as the British Treasury, the Bank of England and the International Monetary Fund have warned that the domestic economy will feel a severe shock. GDP is predicted to fall by 3.5 percent, half a million people will lose their jobs as companies relocate to the Continent and housing prices will fall by 10%, rocking the personal finances of their owners.
The whole of Europe seems certain to return to something similar to the concerns it experienced from a hard and extended period of economic downturn that virtually overwhelmed Greece and Spain. The slow and painful recovery from that episode has effectively come to a halt, as the future of the European Union trading bloc itself has come into question. The euro dropped nearly 4 percent on the morning after the vote.
Immigrant Fears Trump Economic Fears
The success of the “Brexit” campaign is seen as a validation of anti-immigrant sentiments, and this has repercussions around the world. Proponents of the victorious Leave side made much of Turkey’s ongoing attempts to join the EU, raising the spectre of Muslim Turks streaming into Britain.
This resonates with the presidential campaign of Donald J. Trump who arrived in Scotland to visit his golf course on the morning after the referendum. He hailed the results as a historic taking back of control and predicted such movements will take hold around the world. Key planks in Trump’s platform for the White House include a halt to Muslim immigration, the deportation of illegal immigrants, and the building of a wall on the border with Mexico, not to mention the breaking of trade agreements such as NAFTA.
The United Kingdom and the whole of Europe are certainly entering a period of economic volatility. What is not certain at all is how England’s extraction from the massive EU trading bloc will play out in the two-year period given for it. The UK must re-negotiate its position with its pending ex-partners (who have warned that will not be easy) as well as with the USA and other nations. Trade disruptions and their ripple effects appear inevitable.
Furthermore, that British voters revealed the importance to them of national identity, their disdain for the political elites and their opposition to a multi-national economic agreement should signal to investors that American voters may very well do the same thing.
With this political and economic uncertainty holding sway for the undefinable future, investors will undoubtedly be seeking safe havens for their wealth.