By Danny Jasper, Senior Vice President of Capital Markets
Global and domestic markets are scrambling to find safety on this historic day, as in a huge surprise for investors, the UK referendum vote on whether to leave the European Union ended with the “Leave” campaign prevailing with 51.9% of the vote. This result shocked markets, which ended Thursday, June 23, with equities sharply higher as (literally) all reports yesterday had indicated that the “Remain” campaign had as much of a 90% chance of winning the vote (apparently pollsters in the UK need to do a better job at sampling).
It appears voter turnout was a major catalyst in the “Leave” camp victory, as inclement weather and perhaps over-confidence from the “Remain” camp kept turnout in the mid-70% range as opposed to the low 80s, which boded well for the more passionate reformers who had become so frustrated on immigration, EU regulations, and a lack of influence on decisions being made in Brussels. The UK now starts the process to end its 43-year partnership with the EU.
To clarify, the UK is not automatically out of the EU as of this morning because of the referendum vote. In fact, they will likely remain in the EU for quite some time. In the near future, Article 50 of the Lisbon Treaty (created at the formation of the European partnership and that which deals with how a country withdraws from the Union) will be enacted, and it provides a two-year period (or potentially longer if both sides agree is necessary) during which the withdrawal is negotiated. The sides will need to negotiate all new trade agreements (since those currently in place won’t apply to the new independent UK), figure out what to do to prevent a huge drop in business investment and capital flows into the UK, and deal with a host of other items that need to be sorted out before the UK officially exits.
The negotiations will likely result in some form of economic partnership program (which would be beneficial for both sides) being enacted, but a key question will be how tough the EU will be on the UK after they turned their back on the rest of its members and potentially created some significant contagion risk from other struggling EU nations. If the EU is too soft on the UK during negotiations, that weakness could convince countries like Spain, Portugal, and Greece to potentially follow suit and leave the EU as well in hopes of also being able to negotiate better terms. If they are too harsh, the economic ramifications would lead to a likely severe recession in Britain that would have large economic ramifications on the EU and global economy.
Could the entire EU partnership now be at risk? It’s obviously too early to tell at this point, but current trading patterns confirm that global markets are in disarray and volatility is likely to remain for quite some time. To add to the uncertainty, British PM David Cameron announced his resignation this morning after losing his fight to keep the UK in the EU, and additional questions will be raised as to who will be the new UK Prime Minister to guide the country through these uncharted waters. Any likelihood of a Fed rate hike this year has pretty much been eliminated as well. All aboard! It’s going to be an interesting and wild ride for the next few months as this situation continues to develop.