The U.S. woke up to stunning news this morning on the east coast when the Leave side pulled out a surprise victory in Britain’s vote to exit the European Union. Shortly after the BBC called the contest for the Leave camp, Prime Minister David Cameron announced he would step down by October. The news left Britain’s Conservative Party and world markets in chaos.
Adjectives fail to convey the slaughter going on in global stock markets. European markets reached correction territory in just a few hours, Asian markets tanked along with them. In U.S. markets Dow futures were down 500 points before markets opened and dropped more than 527 points moments after the opening bell. If the financial shock was bad in the rest of the world it was nearly Apocalyptic in London financial markets.
Chaos
Part of the reason world markets reacted so strongly is the fact that pollsters and analysts were fairly confident that, despite the problems with the relationship, the U.K. would vote to stay in the EU. Keep in mind that most of the big news outlets are headquartered in London and may tend to oversample large urban areas in polling. Indeed, the area around London, Scotland and Northern Ireland voted to stay with the Union. Early exit poll results, which were again centered in urban areas, showed the Stay camp with a healthy margin. Even the leader of the Leave campaign admitted the early results didn’t appear hopeful. What the results mean is that England outside London and Wales voted to leave by overwhelming margins.
A Big “Up Yours” To Brussels
The European parliament has called an emergency session for next Tuesday and the main topic of conversation will likely be how to stop the dominoes from falling and completely unraveling the EU. Already opposition parties in other countries are demanding a vote as well. In France, National Front leader Marine Le Pen said that the French also deserve to weigh in whether they should continue on with the EU and French president Francois Hollande says the EU faces great danger and called for “profound change” to the EU. In the absence of that profound change we could very well be witnessing the first step in the unraveling of the entire EU framework.
EU Says Get Out
Displaying the same political tin ear that prompted the Brexit referendum in the first place, European Commission chief Jean-Claude Juncker said it was sad that Britain had voted to leave but that there would be no renegotiation of Britain’s membership. He also suggested that Britain should move quickly to sever the relationship. Basically EU chiefs told Britain in a somewhat sour grapes tone to get the hell out. Meanwhile, virtually every other European leader is demanding major changes in a last ditch attempt to keep Europe from dissolving into chaos. The Brexit vote woke European leaders up to the inescapable fact that, when it comes to the EU government, they have the problem dictating the solution.
Fed Interest Rate Hike Off The Table
U.S. markets quickly bounced off their lows in late morning trading on the east coast as traders speculated that the Brexit vote would take any interest rate hikes by the Fed off the table for the rest of the year. The true direction of U.S. markets may not be known until Monday when investors have had the weekend to see how the rest of the world is digesting the news.
In a masterful piece of political timing, presumptive Republican presidential nominee, Donald Trump, stepped off his helicopter on a new resort project in Scotland and held an impromptu news conference where he talked about immigration. The timing and optics ensured that Trump would be all over the morning news cycle where he reiterated his support of a tougher stand on immigration.
Now What?
In the short term expect the British pound to stay in the tank and markets to remain mixed. Traders will eventually come to their senses and realize that England is not going to disappear into the sea and is still, individually, the fifth largest economy in the world. But that may not be enough to stop the entire EU from unraveling and, if that happens, the economic chaos will be ongoing.
The world is learning today that our new connected world economy isn’t such a great thing. The smart money will be increasing the percentage of their wealth held in liquid hard assets like gold and silver bullion.