In 1624, John Donne wrote “No man is an Island, entire of itself; every man is a piece of the Continent”. Almost 400 years later, however, a narrow majority of the UK electorate did not appear to share his sentiments. In a very close vote with turnout of 72.2%, 51.9% of British voters elected to leave the European Union (EU), while 48.1% voted to remain. UK shares fell heavily following the result of the much-publicised referendum, dropping by almost 9% on Friday.
Having surged above $1.50 amid expectations of a victory for the “Remain” campaign, sterling subsequently fell as low as $1.32 against the US dollar as the “Brexit” vote pulled ahead. As the results unfolded, and the prospect of Brexit began to appear more probable, Asian equity markets fell sharply. Meanwhile, gold surged and the yen – widely viewed as a “safe-haven” currency – strengthened; gilt prices rose and yields plummeted.
Financial markets have remained volatile today despite the Chancellor George Osborne’s attempt to calm them before they opened. In his statement he said the UK was ready to face the future “from a position of strength”. Bank, airline and property shares have tumbled though, and sterling has continued to fall with the pound down 3.2% to $1.32260, having earlier hit a fresh 31-year low of $1.3151, sinking below the level it had fallen to on Friday when it recorded its biggest one-day fall ever against the dollar. Against the euro, it was down 2.6% at €1.19990.
some market and economic volatility should be expected
On Friday following the referendum result, Governor of the Bank of England (BoE) Mark Carney stressed the resilience of the UK’s financial system and maintained that there would be “no initial change” in the way that Britons travel or trade, although he warned that some market and economic volatility should be expected. The Confederation of British Industry (CBI) called on the Government and BoE to shore up confidence and economic stability, but observed that “rushed decisions” would not be appropriate. The British Chambers of Commerce (BCC) also urged the Government and BoE to take “swift, decisive, and coordinated action” to stabilise markets if necessary.
“Markets move up, markets move down. We don’t yet know where they will find their level and the whole aspect of volatility is that there is a trial and error process going on before markets discover what the right level of stock markets and exchange rates actually are,” the former Bank of England governor Lord King said today. He steered the Bank through the 2008 financial crisis and said there was no reason for people to be particularly worried, “what we need is a bit of calm now, there’s no reason for any of us to panic.”
“what we need is a bit of calm now, there’s no reason for any of us to panic.”
Looking ahead, as the UK starts the convoluted process of detaching itself from Europe, sentiment is likely to be adversely affected by concerns over the future. The BCC warned that “confidence, investment, hiring and growth” are all likely to be undermined by a protracted period of uncertainty. Meanwhile, political instability has been exacerbated by the news that Prime Minister David Cameron will step down by October, and the process of selecting a new Conservative Party leader (and therefore Prime Minister) must begin. Adding to the markets lack of confidence is the news of a possible vote of no confidence in Jeremy Corbyn as leader of the Labour party, as most of his shadow cabinet resigned. Furthermore, following Scotland’s “remain” vote, the referendum’s result has reignited debate over the question of Scotland’s independence, and the possible break up of the UK.
Elsewhere, the result is expected to throw an unwelcome spotlight on existing divisions within the rest of the EU. And, of course, there will be questions over how soon the UK will invoke Article 50, which sets out the – as yet unprecedented – procedure for the withdrawal of a member state from the EU. The Conservative Party (including the Brexiteers themselves) wish to wait until October when they will have selected a new Prime Minister, with just informal talks beforehand. However the EU leaders want the process officially started as soon as possible to stem the uncertainty and market volatility, with the German Chancellor, Angela Merkel, saying there can be no talks on Brexit before the UK formally begins the process of leaving the EU.
There is little doubt therefore that not just the UK, but Europe and the rest of the world also face an extended period of uncertainty and market volatility. It is to be hoped that in the longer term there will be more opportunities than difficulties in leaving the EU, but as the full ramifications are realised, the effects are likely to be felt by us all. The best advice is probably that issued by the government during the Second World War (when ironically we were fighting to retake Europe) as we ride out the initial storm – “Keep Calm & Carry On”.