Britain’s vote to leave the European Union has set in motion many ramifications but its most profound impacts will not be immediate.
In the run-up to the U.K. referendum, polls were showing that the remain camp was in front, albeit just, but as the night of June 23rd unfolded, it became clear that a slim majority of the British public voted to leave the European Union.
It did not take long for David Cameron, the prime minister who led the anti-Brexit effort, to announce he was stepping down before the next Conservative party conference in October and the political pundits to start musing over who would replace him.
The next step is for the U.K. government to invoke Article 50, officially notifying the European Council of Britain’s intention to leave and to begin the formal process of separation. Although this process could be started immediately, it is likely not to happen until a new Tory party leader is elected. It also gives the government time to develop its exit strategy before initiating the official negotiations.
One of the questions is whether the dire warnings from international financial and trade bodies including the IMF, World Bank, Bank of England, and World Trade Organisation will materialize. They all clearly laid out the risks to global growth, trade, foreign investment and financial market stability.
In the meantime, other organizations are pointing out that while global markets are roiling and the British pound sterling is plunging against other currencies, the impacts of Brexit will be longer in coming for other aspects of securities trading and operations.
For instance, the International Swaps and Derivatives Association (ISDA) is reminding market participants that current derivatives contracts are not affected.
“In light of the vote, ISDA is working with members to ensure the derivatives market is able to continue functioning safely and efficiently,” according to a statement ISDA officials issued on Friday morning (June 24).
“It is important to stress, however, that the U.K. vote to leave the E.U. will not have an immediate impact on the legal certainty of existing derivatives contracts, nor will it require any immediate contractual change or action from counterparties,” according to ISDA, which oversees derivatives contracts. “Once the U.K. government serves formal notice of its intention to withdraw, the U.K. will continue to remain a member of the E.U. for at least two years. During that time, existing European treaties, directives and regulations will remain in force.”
In addition, ISDA has scheduled a webinar call for “members to discuss the implications of Brexit” on June 29, Wednesday, at 2:15 pm British Summer Time (BST), which is 9:15 AM on the East Coast of the United States, officials say. ISDA will also host a press briefing on the same day at 3:30 BST, which is 10:30 Eastern Standard Time (EST). ISDA will issue registration details prior to both calls. Previously, ISDA issued an analysis on the contractual issues arising from Brexit at http://bit.ly/2940KOP
Although views vary, it will definitely not be an easy road ahead.
As Neil Williams, group chief economist at Hermes Investment Management, notes the decision was a “curve ball,” but “the U.K. economy will of course ‘survive,’ given its entrepreneurial flair, increasing focus on non-E.U. trade, and likely policy accommodation by the Bank of England and U.K. Treasury.”
Yet “getting to the next stage looks like a long, drawn-out ‘can of worms,’ leaving considerable uncertainty for U.K. assets and markets. The extent of this damage now rests on the manner of the exit,” Williams adds.
The uncertainty is already wreaking havoc with the pound slumping to its lowest level in 30 years while the FTSE 100 plunged by more than eight percent in opening trade, with losses felt most keenly by housebuilders and banks.
Moreover, barometers of risk aversion have skyrocketed in value with the 10-year U.S. Treasury yield dropping toward 1.50 percent, the lowest level since 2012.
Meanwhile, gold the safe haven in troubled times rose by 4.6 percent to $1,313 per ounce, having earlier touched $1,358, its highest level in more than two years. Moreover, the Japanese yen jumped three percent to ¥102.81, earlier moving below ¥100, its strongest since November 2013.
Aside from the negotiations, a main concern is the risk of contagion in Europe where many countries are also not happy with the status quo at the E.U. and have seen the rise of right wing nationalism.
Rick Lacaille, global chief investment officer at State Street Global Advisors, points out that “while the vote to leave has immediate market implications, over the longer term, observers will be wary of the impact the vote has on other nationalist and protectionist movements — both in Europe and elsewhere. In Europe, nationalist parties will feature prominently in elections next year in Germany and France.”
Lacaille adds that “there is the potential for knock-on consequences for market-moving issues like trade, labor mobility and foreign investment. How the E.U. strikes a balance between facilitating a swift U.K. exit to reduce risk as quickly as possible, and discouraging similar movements in other countries, will be important.”
- Additional reporting by Eugene Grygo
