Bet you didn’t see that coming…
by Blaine Rollins, CFA, 361 Capital
In a pickle is where the financial world now finds itself. The markets do not like uncertainty and they do not like volatility. With the U.K. voting to leave the European Union (EU) on Friday, we now have both uncertainty and volatility. As the world wonders if Brexit will lead to other EU members following the same path, we have significant confusion on so many items. Who will the new leaders of the U.K. be? Will the new leaders act quickly to leave the EU? How quickly will the EU want to divorce the U.K.? Could Scotland veto the U.K. exit from the E.U.? Will Scotland and Ireland, who voted to Remain, now want their own independence? Could Brexit cause Brussels to adjust and to better lead Europe in the future?
What we do know is that future investment in the U.K. will be frozen. Too tough to make an investment when you have no idea what the future will look like. The British Pound is down 7% but now it is up to the Bank of England to support it from evaporating further. The generational divide will accelerate as there are fewer reasons for a young person to stay with a country that just lowered its long-term growth rate and devalued itself. Dublin, Paris and New York are looking like a great place to head if you are a young banker. As for U.S. investors? Don’t expect a Fed rate hike this summer, or this year. The markets are even suggesting that a rate cut might now be more likely. So go refinance any mortgage or other debts that you or your clients might have. For the risk markets, U.S. assets now get the upper hand versus Europe. And small caps could outperform large caps, as they have less direct U.K. exposures versus the big multinationals in the S&P 500. Financials look stuck in no-man’s land as interest rates continue to dive. For those overweight financial stocks, a small hedge for you is that the cost of a future vacation in the United Kingdom just fell 10%.
Simply Eric Peters…
The British walked. Which really matters. Making nearly every risk asset on earth overpriced. Because asset values rise when the world moves toward greater integration, and decline during periods of dis-integration. Period. Naturally, war is the ultimate form of dis-integration, and thus the greatest destroyer of wealth and health. Which is why the EU was formed in the first place. Protectionism is economic war. Even the slightest step toward barriers is a step away from progress; reducing global growth, wealth, and the ability to repay debts.
(Eric Peters/Wknd Notes)
Investment uncertainty in the U.K. on so many levels…
Credit ratings agency Standard & Poor’s warned on Friday that the vote would stymie investment, and reduce demand for sterling reserves and assets.
“If you’re making five to 10-year capital commitments, you want to know what the prospects for that region are. Markets hate uncertainty and I think people will hold off making that decision until things are clearer,” said Piers Hillier, chief investment officer at Royal London Asset Management, which holds over £87.9 billion in assets under management.
(WSJ)
So what could the Brexit timeline look like? So many unanswered items, but Citigroup has one idea…
E.U. leaders have Britain’s bags already packed for them…
“I do not understand why the British government needs until October to decide whether to send the divorce letter to Brussels,” Jean-Claude Juncker, the president of the European Commission, told German television.
“I would like it immediately,” he said. “It is not an amicable divorce, but it was also not an intimate love affair.”
(NY Times)
Goldman quickly shifts to a recession forecast for the United Kingdom…
The most significant change is a sharp cut in our UK GDP forecast by a cumulative 2¾% over the next 18 months, which implies that the economy enters a mild recession by early 2017. We have also reduced our Euro area GDP forecast by a cumulative ½%, which implies an average growth rate of 1¼% instead of 1½% for the next two years, and have shaved our US GDP forecast for the second half of 2016 by ¼pp to 2%.
(Goldman Sachs)
About those ‘leave’ campaign promises…
The leave campaign has appeared to row back on key pledges made during the EU referendum campaign less than 24 hours after the UK voted for Brexit, after it emerged immigration levels could remain unchanged.
Leading Brexit figures had disagreed throughout the campaign on issues including immigration, free movement and the cost of the UK’s EU membership.
But within hours of the result on Friday morning, the Ukip leader, Nigel Farage, had distanced himself from the claim that £350m of EU contributions could instead be spent on the NHS, while the Tory MEP Daniel Hannan said free movement could result in similar levels of immigration after Brexit.
Hannan said: “Frankly, if people watching think that they have voted and there is now going to be zero immigration from the EU, they are going to be disappointed.”
The First Minister of Scotland, along with the majority of her population, is not happy…
What if Scotland could block Brexit or even force significant change?
Maybe London should also decide to ask for independence from Britain…
(Fusion)
Love this item from Barry Ritholtz…
6. The Sun Really Has Set on the British Empire
Just in case you had any doubts, the U.K. has now completed its historical round trip, making the transition from a small, impoverished island dependent on farming and fishing, to globe-spanning imperial power, back to a small impoverished island dependent on farming and fishing.
Sure, the U.K. has nuclear weapons, just as fat middle-aged former footballers still have their old team jerseys. Each is a remnant of former glory days, long since gone.
Great…
@StigAbell: Amazing Guardian comment on the poisoned chalice of #Brexit.
Now Cut > Hike…
Call your mortgage broker…
A quick glance at the survivors and losers last week…
Not a lot of surprises given the violent reactions on Friday. This week will be more telling where investors want to place their chips for the rest of 2016. We have a good sense from Friday where they no longer want to have exposures. That is typical: Sell first, Buy later.
Twitter and the net were on fire after the vote. Some of my favorite items…
@GoogleTrends: “What is the EU?” is the second top UK question on the EU since the #EURefResults were officially announced
(xkcd)
And Lastly…
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This post was originally published at 361 Capital
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