The Brexit decision gutted stock markets worldwide, at least for the moment. Traders were caught off guard when the UK voted by a narrow margin to leave the European Union. The market went bear overnight with massive sell-offs on Friday.
Stock markets appear to be indicating that something terrible has happened, but nothing has actually changed yet. Britain still exists and politically, they have not left the EU yet. That is a process that will take time, so why the strong reaction? Neil Erwin explains in the New York Times.
“The immediate effects of ‘Brexit’ will flow almost entirely through financial markets. Markets may be flawed, but they really do amount to a real-time verdict by millions of people with vast sums of money at stake on what something will be worth over the indefinite future. Economic shifts happen slowly; financial shifts happen overnight (literally, in this case). The truth is that the stock market declines that took place worldwide Friday are nothing to be too concerned about.”
Stock markets are down, though, and it is hard for those invested to believe it is no big deal, but Stocks are all about confidence. DoubleLine Capital CEO Jeffrey Gundlach told CNBCinvestors just lost confidence. Businesses were not collapsing, they haven’t felt a thing yet. Nothing has really happened, it’s just the fear of the unknown and the uncertainty of a different future that is driving the market down.
“What I think is happening … is there is a bear market in confidence in market manipulators, central bankers, and politicians broadly. And I think there’s a bear market in confidence in planning.”
The Brexit vote has changed nothing at all yet, outside the realm of financial speculations. Jeffrey Gundlach indicated to CNBC Britain was never fully invested in the EU, to begin with.
“In Britain, they were never really in the [EU] ever; they never adopted the euro currency, When you think about it, it’s no surprise to see they were the first to give it up.”
Stock markets plunged around the world as traders reacted to the Brexit news. In the U.S., the Dow was down by over 600 points or -3.4 percent, S&P was down by 75.9 or -3.6 percent, and the Nasdaq was down by 202.1 or -4.1 percent in the U.S., according to Business Insider. European markets suffered even more.
Brexit drove UK stock markets into a selling frenzy. The FSTE dropped by -8 percent and was down 100 points. That amounted to £120 billion in value. Hardest hit in the British markets were banks and home builders. Barclays stock dropped -22 percent and Lloyds stock fell by -18 percent. As for the home builders, Travis Perkins stock was down by -43 percent while Taylor Wimpy stock was down by -32 percent, according to The Independent.
Asian Stock Markets reacted powerfully to Brexit as well, with the Nikkie closed down by -7.9 percent. Hitachi stock is down by -10 percent. This is the biggest one-day loss in five years according to Market Watch.
Brexit is also delivering some rather telling aftershocks in the currency and commodities markets. Gold is now $1,322.40 a troy ounce. That is up significantly. Rising gold prices generally indicate a loss of confidence in the market and overall economic fears, as Gundlach explained to CNBC.
“Gold is a play in a bear market in confidence.”
Falling Stock Markets also lead to increases in treasury bond sales according to the New York Times. When stocks are risky and declining in value, investors take their money out quickly to invest in gold or treasury bonds. These investments keep their money safe until stock investments become profitable again.
Brexit could cause one major and immediate problem for Britain,though, and that is a sudden devaluation of the British pound. The pound experienced a 7.6 percent drop in value against the U.S. dollar. That is likely to cause rapid inflation. According to the New York Times, other reactions to the market will likely add a recession to the mix so that British people will have less money to spend while everything costs more than ever. Still, there is good news. Devaluation of a nation’s currency sparks an increase of industry because it allows that country to price their goods comparatively lower than the foreign competition both domestically and abroad.
After the Brexit stock market crash, what is likely to happen in the coming months? Neil Erwin explains in the New York Times how businesses will become more cautious and apprehensive about hiring additional employees or engaging in excessive spending for a while, at least in Britain, and this could result in some economic slowdowns in the coming months.
“As the months pass, the economic consequences of Brexit become less about financial market disruptions and more about real economic activity. Within Britain, a pall of uncertainty is likely to be cast over every business’s decisions. Things like business confidence, market swings, and central bank responses shape the economy in the short and medium run, but over time it is bigger forces that prevail.”
Though Brexit has been decided by popular vote, there are still choices. Will the UK become more isolationist or enable trade to continue and at what if any cost in tariffs? These decisions and later adjustments to those decisions will determine the fate of the economy. Tariffs could make imports less affordable than domestic goods giving a boost to their domestic industry, but will serve to isolate Britain from the rest of the world as Neil Irwin explains in the New York Times.
“Britain will get through the immediate financial turbulence and a possible recession just fine. The question for its future is which of two options British leaders now choose. They can maintain the status quo and remain a major international business center (while ignoring the impulse that led voters to choose “leave” in the first place). Or they can become a smaller, more isolated island that is a less important cog in the global economy”
The Brexit stock market crash need not continue and is simply about investors regaining confidence in Britain as independent of the EU.
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