Brexit, lights go up

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Well, the UK has voted. And the decision is to go, 51.9% to 48.1%. The breakdown was England wanted to leave, but Scotland and Northern Ireland wanted to remain.
The usual safe havens have lit up in the immediate aftermath. At time of writing US 10-year treasuries rallied such that the yield went under 1.5%. German bunds are at minus 0.15%, that is, you ‘pay’ to store your money. The reason for German bunds to be priced so strongly is they are seen as the strongest place within the EU to park your funds – for those who are concerned about the peripheral states being separated from the core, the flow is to move money from the risky periphery into the safety of the centre.
Gold is up 5% and riskier assets, such as equities, down. The ASX closed down 3%, and across Asia the markets were mixed but generally down (China slightly up, Malaysia slightly up, through to Japan down almost 8% at time of writing). In Europe the futures markets are pointing to a 9% slump and the UK to follow along with 7%. Likewise futures indicate a 4.5% slump in store for the US.
So nobody wants to buy today, everyone wants cash and safe havens. Blood in the streets … sounds like time to keep your head … bargains often glint through.
News sources will talk up calamity, but I expect they will not get it. Expect the first few days post the vote to be a rash of stories of how this or that could be a disaster. But it is all ‘could’. People will get on with their lives and they will continue their purchasing habits, so the economic drivers haven’t changed. No rules or access arrangements have changed.
The big Wall Street and London banks have crack teams descending on ‘situation rooms’ at Canary Wharf to comb through what actions to take and provide management guidance. They will review legislation, comb data, crunch spreadsheets and then after some time say, “But until we actually know what rules will change upon exit, this is all just conjecture”, at which point they will decamp back to business as usual.
In the first days, central bankers will reemphasise their commitment to stand ready. In subsequent days they will downplay the ‘economic catastrophe’ warnings of the campaign and substitute them with solemn promises to work through the challenges. Later there will be brighter views about how a standalone Britain will forge its way in the world.
What I am saying is the emotional and political statements leading into the vote will give way to mundane analysis, and this will find that people engage in commerce out of self-interest, and so too will the UK and the EU re-establish cordial trade relations.
Markets will have shrugged this off within the month. Especially when there is no actual time to depart. What Britain has now is a desire to depart, a trigger to depart, an ‘option’ in financial language. You only exercise an option if it is your interest to do so.
In the wake of the vote, risk assets – equities – are on sale, they are good buying. Safe havens – fixed interest – are a crowded trade … they offer little by way of value.
As I say, Y2K, the sequel. Time to keep your head when those around you lose theirs.
– John O’Connell