Uncertainty grips financial markets following Brexit

The City of London, the financial heart of the UK. Image.kloniwotski

The City of London, the financial heart of the UK and recently voted the most important financial centre in the world. Image: kloniwotski

Global financial markets have been in disarray following the UK’s vote to leave the European Union. Financial markets bet heavily on Thursday night that Britain would remain within the economic and political union, with the Pound rising sharply after polls closed at 10pm. However, these gains were wiped off when Sunderland voted overwhelmingly for Brexit with the pound falling further throughout Friday.

When markets opened on Monday, the pound then declined substantially against the US dollar, the usual indicator to show currency strength. Currently the Pound stands at $1.31, the lowest level for over thirty years. Furthermore, the Pound/Euro exchange rate now stands at €1.19, down 10 cent since last week.

On the London stock market, there have been substantial losses since the vote. The FTSE 100 index, which is the 100 most valuable companies in Britain closed down 2.6% today after falling 3.2% on Friday. On the FTSE 250, the market fell a further 6.97% after falling 7% on Friday, the biggest day to day fall since the 1987 recession. The FTSE 250 is an important indicator of the UK economy, as the index represents more UK focused companies. 

For particular sectors, the fall was particularly bad. The financial, property and travel sectors were big losers from the vote. Barclays shares fell 20% on Friday and declined a further 17% today causing trading to be suspended briefly on the London Stock Exchange. The Royal Bank of Scotland also faced similar falls of 18%. Easyjet’s share price declined 22% today, with BA’s owner closing down 16%.

Across Europe, markets declined as well. Both the German Dax and France’s CAC 40 down 3%. In the U.S, Wall Street’s two main indexes, the Dow Jones and the Standard and Poor 500 were down 1.5% and 1.7% respectively.

Furthermore, Standard & Poor, a credit ratings agency, declared that Britain had lost its AAA rating, moving down to AA. Theoretically, this decision means that borrowing is now more risky to the UK. However, the interest rate yield on 10 year government debt bonds declined below 1% meaning the markets are relatively unconcerned with the UK government’s ability to service the national debt.

The primary cause of this uncertainty is because financial markets did not expect a leave vote, hence the dramatic falls. On Friday alone, $2 trillion was wiped off global markets as the leave vote shocked financial analysts.

However, despite the dramatic falls, the UK is the world’s fifth largest economy and the uncertainty is likely to subside rapidly once the government announces its negotiation platform. Most commentators expect that the government will push for access to the single market, possibly by joining the European Economic Area, meaning that economically nothing would have changed due to the referendum vote.

Furthermore, the Bank of England’s governor Mark Carney has tried to reassure markets stating the Bank would do whatever necessary to protect the UK economy. Chancellor George Osborne re-iterated this message today again in an attempt to placate the currency markets. These announcement went some way to sooth market concerns but not remove them completely as the shares in Easyjet and Barclays show.

The respected former Governor of the Bank of England Lord Mervyn King stated today that in the long run the UK economy will return to normal, decrying both sides for their over-exaggerated attitudes.

As the financial markets were blind-sided by Brexit, uncertainty is unsurprising. It will be years before the current cost of Brexit is known, however, in the coming months markets are likely to rebalance slightly with the dramatic falls not likely to continue beyond the summer.

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