When Will Britain Feel The Effects Of A Brexit?

A Tsunami is Coming but Right Now Britons Are Enjoying Receding Waters……

The Brexit was supposed to herald the dawning of the financial apocalypse. The ill-fated referendum gave rise to a shock result that has reverberated around the world. By a margin of 51.9% – 48.1%, Britons voted in favour of a separation from the European Union. In the days, weeks and months leading up to the historic vote, analysts on both sides of the spectrum were warning of the dangers that lay ahead.

For the remain campaign, talk of job losses, a collapse in the housing industry, deep cuts to personal disposable incomes, and severe unintended financial consequences were bandied about. For the Brexiteers, safe borders, direct control of UK legislation, and cost savings were trumpeted.

For the most part, nothing has really changed or has it?

Economists, analysts, talking heads and laypeople are at odds with one another regarding the impact of a Brexit to date. There are some important takeaways from what has already transpired, and from that we can infer what is likely to happen moving forward. Presently, the GBP/USD currency pair is trading at 1.2915, down 0.81% or $0.0106. The cable has plunged to a 31-year low and is falling fast.

(Click on image to enlarge)

That it broke through the critical 1.30 support level is important. Conversely, we have seen something typical, although unexpected (for a Brexit) occurring. The FTSE 100 index initially plunged beneath the critical 6,300 level, and then dropped briefly below the 6,000 level after the vote. Now, the FTSE 100 index is trading at 6,468.87, down 1.54% or 76.5 points.

For a casual observer, the performance of the FTSE 100 index and the GBP seem to be at odds with one another, but this is not the case. Recall that in Japan when the USD/JPY currency pair started depreciating and the Japanese yen moved closer towards the 100:1 level with the dollar, the Nikkei 225 index started performing poorly.

Currency Markets and Equities Markets Move Paradoxically

That it broke through the critical 1.30 support level is important. Conversely, we have seen something typical, although unexpected (for a Brexit) occurring. The FTSE 100 index initially plunged beneath the critical 6,300 level, and then dropped briefly below the 6,000 level after the vote. Now, the FTSE 100 index is trading at 6,468.87, down 1.54% or 76.5 points.

For a casual observer, the performance of the FTSE 100 index and the GBP seem to be at odds with one another, but this is not the case. Recall that in Japan when the USD/JPY currency pair started depreciating and the Japanese yen moved closer towards the 100:1 level with the dollar, the Nikkei 225 index started performing poorly.

Currency Markets and Equities Markets Move Paradoxically

We see precisely the opposite occurring now in the United Kingdom and it makes perfect sense. In Japan’s case, a strong Japanese yen is bad for companies involved in the business of exports. When the Japanese yen is performing well, Japanese exports are relatively more expensive. This bodes well for imports which become relatively cheaper. However, in the UK, the GBP is plunging fast. UK exports abroad are relatively cheaper given that the GBP/USD pair has plunged over 12.40% for the year-to-date.

But here’s the clincher: The global economy is entering a recessionary period. This is evident with the negative interest rates in Japan and Europe. Plus, the bearish downturn that has forced investors en masse towards government bonds, gold and the JPY. Overall, a risk-off approach to equities is pervasive. We have seen upwards of $2 trillion erased from global bourses in the days following the Brexit referendum.

That a mini recovery has been staged since then will not undo the damage that has been done. The FTSE 100 index is an interesting index in that 75% of the revenues generated by companies listed on the index are based overseas. This means that earnings in euros and dollars are worth more in GBP when they are repatriated to the UK. This naturally raises the share price of those listed companies.

(Click on image to enlarge)

The FTSE 250 index however is a completely different ballgame. The companies that are listed on that index are largely based in Britain. The impact of a Brexit on the FTSE 250 listed companies is negative and this is evident in the 10% declines we have seen. When the GBP is weak, imports cost more in local terms. And since the UK imports petroleum, housing supplies, iron ore, steel, agricultural produce et al, costs are going to rise.

We have already established that exports are not prospering like they were during the bull run following the global economic crisis of 2008. The US has officially exited the golden period, and a slowdown in economic activity is evident across the board. This was precipitated by the Chinese economic meltdown at the beginning of the year when both the Shenzhen Composite index and the Shanghai Composite index plunged, taking trillions of dollars’ worth of value with them.

Visible Negative Effects Post-Brexit for the UK

• The shock depreciation of the GBP/USD currency pair as it plunged to 31-year lows
• The announcement by Prime Minister David Cameron that he would be stepping down in October 2016
• The political disarray in Tory Party and the Labour Party leadership circles
• Announcements by major automobile manufacturers, banking giants and multinational conglomerates that they may consider job cuts or relocations of enterprise to other European countries
• A rush on UK government bonds that has taken prices to sky-high levels and plunged yields to record lows

While Britons were eager to vote to break from the EU, there may come a time in the not too distant future where they will have to pay the piper for the deeds of yesterday.