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Brexit becomes a reality

Published Friday, June 24th, 2016

Britain has sent shockwaves across the world this morning after voters confounded pollsters for a second time in a little over a year and unexpectedly opted to leave the European Union. The historic vote represents a major polling upset with surveys in the run up to the referendum giving the Remain campaign a narrow but decisive lead. In the end, those in favour of a Brexit won by a slim margin of 52% to 48% and brings an end to 40 years of EU membership. The Leave victory came on the back of months of fierce campaigning that had split the country and rattled global financial markets. World leaders and central bankers were also drawn into the debate as was the IMF, OECD and World Bank which had warned of the negative economic consequences of a Brexit.

Today’s outcome will trigger an unprecedented period of uncertainty. Will the UK economy enter a recession? Will the Bank of England cut interest rates? Will Scotland, which voted overwhelmingly in favour of Remain, push for a second independence referendum? The vote has already claimed its first casualty after Britain’s pro-EU Prime Minister David Cameron resigned. Questions will also be asked of the European project which may have just been delivered a potentially fatal blow as other member countries ponder their future within the bloc.

The reaction has been instant given that most market participants had positioned themselves for a vote to stay in the EU. The most notable victim has predictably been the pound which tumbled 11% against the dollar in the early hours of this morning to a thirty-year low and is down 8% at the time of writing. European stock markets are plummeting 8% as banking shares come under selling pressure and follows on from similar slump in Asia which was led by a 7.9% fall on Japan’s Nikkei 225. Oil is joining the rout with Brent and WTI both down $2/bbl at pixel time. The freefall in risk assets is sending investors rushing for safe plays. Gold is up 5.5% and 10-Year Bund yields are back in negative territory, falling 20 basis points to -0.01%. Europe is facing its very own Lehmann moment and markets are set to be gripped by heightened levels of volatility in the weeks ahead.

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Posted by Stephen Brennock

Stephen Brennock joined PVM in 2013 after having worked as a project manager for a business development firm. He graduated with a degree in Business Management in 2007.