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Long term impact of BREXIT

As I am sure you’ve probably heard, UK voters have decided in favour of leaving the European Union. In order to give you some clarity on the issue, attached to this email you will find a special report from BMO Capital Markets on the long-term impact of BREXIT on the global economy. Having a long term plan and investments with very low volatility will always help you navigate through difficult markets, no matter what the situation is.

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

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

 

What Happens Next?

 

• David Cameron announced he 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 an exit 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 as one, 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 (9th largest in the world, 2% of global GDP) and its small share of trade with Canada & 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

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