Investors shocked by referendum result

Global Briefing

 

June 2016 is set to go down in history as one of the more eventful months in recent memory. In the much-discussed referendum over the UK’s future within the EU, a narrow majority of Britons voted by 52% to 48% in favour of quitting Europe. Financial markets were rocked by the news: share prices plunged, sterling plummeted to a three-decade low against the US dollar, the yen surged, global bond yields dropped, and the UK’s credit rating was swiftly downgraded .

The result triggered a wave of political instability in the UK: Prime Minister David Cameron announced that he would step down, prompting a leadership campaign; the Labour Party also found itself in disarray. Elsewhere, the debate over Scotland’s future within the UK received fresh impetus.

amid high levels of economic and political uncertainty, further volatility appears very likely

The prospect of Brexit drove down the pound and drove up investors’ aversion to risk, stoking interest in defensive sectors and in UK companies with substantial overseas earnings. This proved positive for blue-chip stocks, which tend to have a global reach: having fallen by almost 9% in the immediate aftermath of the referendum, the FTSE 100 Index ended June in positive territory, rising by 4.4% over the month and reaching its highest level since August 2015 . In contrast, the FTSE 250 Index – which has a relatively high concentration of domestically focused constituents – fell heavily, losing over 14% in the two trading days after the vote, and ending June 5.3% lower than it began.

Investors around the world were shocked by the result of the referendum, and financial markets experienced high levels of volatility . In Europe, the Dax Index fell by 5.7% during June, while the CAC 40 Index dropped by 6%; meanwhile, Japan’s benchmark Nikkei 225 Index plummeted by 9.7%. In contrast, the Dow Jones Industrial Average Index edged 0.8% higher over June. Investors drew reassurance from leading central banks , as policymakers signalled their willingness to intervene if necessary. In particular, as June drew to a close, Bank of England Governor Mark Carney indicated that fresh monetary easing may become necessary in the wake of the Brexit decision.

Although many leading equity markets – including the UK – staged a rebound after the initial shock of the vote, there is little to suggest that the worst is over. Looking ahead, amid high levels of economic and political uncertainty, further volatility appears very likely.