Brexit Surprises the Markets: Initial Thoughts

Financial markets have rallied into the Brexit vote this week indicating that the markets believed the exit was not going to be the outcome.  Because financial markets hate surprises, the vote to leave the EU is creating a selloff and generating increased volatility.

Let’s put this in perspective:

  • US equities, as of Friday (07/01/16) morning, are at the same level they were early last week (i.e. around 2060 on the S&P 500 and 17,600 on the Dow Jones Industrials)
  • The flight to quality benefits U.S. Treasuries, the U.S. Dollar, and high-quality bonds.
  • The greatest impact of the vote in currency markets is, naturally, with British Pound selling off sharply (as to be expected) and turmoil in other currencies as well. Fortunately, we reduced our exposure to hedged equities (e.g, hedged against the yen) earlier this year.
  • The Brexit vote is a ‘non-binding’ decision, but initiates a process negotiations which is slated to be a 2-year ‘disentanglement’ process for the UK to exit the EU. This is the protocol under the “Lisbon Treaty” that set-up the EU and is the governing accord.
  • The Fed has been closely watching global conditions. The minutes of their meetings show that the Fed will adjust their policy accordingly and also suggests that the Fed will continue to be on hold, i.e., monetary policy should continue to be accommodative.

 

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