On June 23rd 2016, the United Kingdom officially voted to leave the European Union. Yet, the people and even the UK government seem to be perplexed about their country’s future. The “Leave” side argues that the British economy along its financial industry will eventually recover and grow even stronger due to its independence from the European Union. However, the “Remain” side believes that such expectations are both highly improbable and ambiguous.
Investment banks around the world are now having significant negative reactions to this turmoil, as “In the US, banks opened sharply down. Morgan Stanley and Citigroup were the hardest hit soon after the open in New York, down about 9 per cent and 8 per cent respectively. Bank of America dropped 6.8 per cent, JPMorgan Chase 5.3 per cent and Goldman Sachs 6.1 per cent”(Noonan, Laura & Arnold, 2016). Despite significant losses following the vote, the domestic markets started to perform impressively soon after in Britain. The FTSE 100 increased by almost 10% since the day of BREXIT until July 5th (See figure 1). The Foreign indices, S&P 500 Trust (Red Graph) and Euro Currency Trust (Orange Graph) both also crashed after BREXIT like the FTSE 100, but eventually started to increase within four days. However, it is still possible that the growth may be sluggish soon because of investors’ anxiety over a hypergrowth in the index and the potential of another independence referendum in Scotland. The cold atmosphere of financial service firms in London is also seen to be another cause of additional uncertainty, as “Frankfurt is well placed to benefit from the Brexit fallout, which could see a fifth of London's finance jobs shifted from the UK capital, according to a survey by the Boston Consulting Group” (Eschenbacher, 2016).
Figure 1: FTSE 100 (2 weeks)
One the vote was finalized and announcement to the public, the value of the British Pound began to constantly drop, recording a 10% decrease in less than two weeks (see figure 2). The foreign exchange market is especially volatile these days. The UK’s main source of national output is trade so the current situation could potentially offer them more benefits in the future. However, this is still highly unclear because no one knows how the new trade agreement between the UK and the EU will turn out. In fact, the trade talks will not be beginning anytime soon. "First you exit then you negotiate", said Cecillia Malmstrom, the EU Trade Commissioner (Urban, 2016). The UK will not be able to conduct its own trade talks for up to two years. This uncertainty is expected to significantly affect the financial markets. “Britain should move quickly to keep investment flowing and preserve the City of London's dominance in financial services after last month's vote to leave the European Union”, the head of London's financial district said on Wednesday (Jones, 2016).
Figure 2: USD per 1 GBP (1 month)
Britain’s main industries are financial services and manufacturing, such as automation equipment, aircraft and shipbuilding. Trade conditions are especially vital for these industries since they must export much of their products to Europe and they form a large part of the FTSE. Consequently, one of the largest parts that could determine the future of British financial services would be the terms of trade agreement with the EU. However, the uncertainty is presumed to continue even after the trade agreement is made two years later; the effects of new terms will have to be observed by the investors. The result of competition between the London Stock Exchange and the Frankfurt Stock Exchange will also be a significant variable that could change investors’ decisions in Britain. The prospects of markets are still all mixed for now as the uncertainty strongly persists these days.
Noonan, Laura & Arnold, Martin. “European and US banks caught up in Brexit reaction” June 25 2016. Financial Times.
Eschenbacher, Stefanie. “Brexit could see one in five banking jobs leave London” July 4 2016. Financial News.
Urban, Mark. “EU Trade Commissioner: No trade talks until full Brexit” June 30 2016. EU Referendum.
Figure 1: FUTSEE 100 CHART” July 7 2016. LIVECHARTS.CO.UK
Jones, Huw. “UK ‘needs fast action on EU trade terms” July 6 2016. IOL
Figure 2: “XE Currency Charts (GBP/USD)” Jul 5, 2016. XE
Picture titled, "London afternoon", taken by Nikos Koutoulas on March 29, 2013 obtained through Creative Commons.