Markets anticipated the British referendum to result in a ‘stay’ vote and were caught off guard; causing a strong sell off Friday. What does it mean for the long-term?
Markets anticipated a ‘stay’ result as marked by the 1.5% increase on Thursday, only to sell off 3.5% on Friday after they were surprised with a ‘leave’ result. Repricing is expected given the referendum result, however the bigger question is, what is next and how long should this last?
What is next?
Quite realistic is that additional countries may ask for a referendum of their own, maybe a frexit or Italeave… No joke, those are both terms being thrown around for a French or Italian request. What will determine if these should become a reality, will likely be the extent to which England is able to re-establish trade, currency, and travel agreements. The European Union is incented to make this difficult for England. The more difficult the process is; the less likely other countries will be to follow suit. This also means a deeper impact to the British economy.
How Long Should This Last?
How long the impact lasts may be a little more uncertain. It could be short term (a few weeks) and markets could refocus as 2nd quarter earnings season gets underway. A decent rebound from first quarter is expected. It could be a few months, which would occur if we see referendums from Ireland and Scotland, requesting independence. This would happen as they voted overwhelmingly to remain in the EU. They could vote for independence to be able to rejoin the EU.
Conclusion
What is likely to occur is waives of news. Brexit is likely to be the focus for the next few weeks, with a refocusing on the EU every once and a while as new results come out from the Brexit (trade agreements, referendums and the like). The important detail is that while the vote was Friday, England now has 2 years to negotiate the terms of their exit. This means 3 things, 1) both sides have time to resolve the situation, 2) nothing will get done until the 11th hour, causing brief episodes of increased volatility throughout the next 2 years, and 3) due to the 2 year horizon for completion of the exit, we may not see other nations take action for quite some time.
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