Special Report: BREXIT

Special Report: BREXIT

Jennifer Lee, Benjamin Reitzes, Senior Economists

June 24^th, 2016 (as of 6:30am) 

Market Reaction

• The British pound plunged a record 10% as the outcome of the referendum became clear. The currency touched a three-decade low of $1.3229, and is currently around $1.37

• The Canadian Dollar is weaker at $1.3025

• Gold is up $60 to $1,317

• 10-year Treasury yields are 25bps lower to 1.50% (the all-time low is 1.39%)

• Prospects for already-sluggish global growth to slow further are pushing most commodity prices lower 

What Happens Next?

• David Cameron announced the will step down from his post by October

• The BoE’s contingency plans kick in – clearly, there will be no rate hikes for the foreseeable future

• The UK will have two years to negotiate a deal with the EU

• The UK job market would likely suffer, particularly financial services (a sector which accounts for 8% of British GDP)

• The City of London’s future as a global financial centre is now in question, and a number of global banks could potentially relocate some of their operations out of the UK

• Foreign investment may decline as access to other EU markets could become much more limited. British goods trade with the EU account for 45% of exports and over 50% of imports 

Impact

• The most immediate impact on the North American economy will come from the financial market volatility that we are seeing in the aftermath of the vote

• The Federal Reserve has been hyper aware of global economic risks, and a Brexit qualifies, which rules out a July rate hike. A move by December remains a reasonable possibility

• The UK accounts for a modest 3% of total US trade and an even lesser 2.5% of Canadian trade suggesting a minimal direct risk to the North American economy

• BMO European FX Strategist Stephen Gallo does not rule out a further decline in the British pound or the Euro over the coming three to six months

• There are rumblings of EU membership referendums in other countries

The Bottom Line

 Given the size of the UK economy (9^th largest in the world, 2% of global GDP) and its small share of trade with Canada and the US, the uncertainty and its impact on financial markets may be the biggest negative at the moment

• The broad declines in equities, commodities and bond yields globally point to further downside in near-term global growth prospects

• Brexit is about a trade deal and political arrangements – the biggest loser from Brexit will be the UK itself.