Brexit Fallout

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Brexit Fallout

The surprise “Leave” victory in the UK’s Brexit referendum has changed the calculus of global markets. We have seen the biggest intra-day volatility in the pound on record, as evidenced by it hitting a yearly high and yearly low within hours of each other. But the biggest concern for markets is what the implication of Brexit will be for the European Union. There is a strong incentive for the EU to make the UK’s exit as punitive as possible to severely diminish the risk of other members making the same move.

Speculation in the markets will increasingly focus on the weakest links in the EU, those who are most likely to elect to leave and those who would suffer most under the breakup of the EU. The PIGS (Portugal, Italy, Greece, Spain) are likely to fall under the intense focus of speculators again. Spain also has elections on 26 June and this Brexit vote will likely have a major influence on its outcome.

It is also very uncertain what this will mean for Britain and what sort of timeframe Britain’s exit from the EU will take. Many expect Prime Minister David Cameron to stand down, possibly to be replaced by either Michael Gove or Boris Johnson. But whoever becomes the UK Prime Minister, the primary concern will be quelling market concerns and providing a steady timetable for Brexit to the market.

Safe havens have been surging, the Japanese yen has strengthened 4.4%, Gold has rallied over 6%, and Bitcoin is up 10%. There is increased speculation that the Bank of Japan (BOJ) will be forced to intervene to stem the strength in the yen, particularly given it a one point broke below USD/JPY 100 – a red line for the BOJ.

Coordinated intervention by global central banks and G20 governments may be necessary to stem the selloff. But when there is so much division in Europe at the moment it is difficult to see how they can come together and present a unified case that will reassure markets.

For Australia this is likely to lock in the Turnbull Liberal government’s election as the economy and economic security will probably rocket to the forefront of voters concerns. While it’s difficult to foresee the exact Brexit fall out, there’s now a chance we see a RBA rate cut at the 5 July meeting and were that to happen another one or two more rate cuts could follow it in 2016.

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