Here is an assessment by Stefan Gerlach, BSI Chief Economist and former Deputy Governor, Central Bank of Ireland from 2011 to 2015.
Anticipation during the night of this stunning result triggered heavy unwinding of long positions on sterling denominated assets and, more generally, in risk assets across the globe.
First in line was sterling which fell to around 1.35 against the dollar, the lowest level in more than 30 years, after having risen to 1.50 after the first preliminary results, pointing to a win of the remain vote, were published. The euro was more than 3 percent weaker against the US dollar.
Equity markets fell by more than 3 percent in Asia and the futures point to sharp falls in Europe and US today. The futures on the «FTSE» were down by around 9 percent. Cyclical commodities were also heavily down.
Safe Assets Rally
Conversely, safe assets rallied. Gold climbed above 1,300 dollar per ounce and safe haven currencies, as the Japanese yen and the franc were also stronger against the dollar and the euro respectively. This new situation is a challenge for the Swiss National Bank (SNB) which seems likely to intervene in the forex market to prevent further appreciation of the Swiss franc.
If confirmed, the Brexit vote will lead to a surge in uncertainty about the economic outlook and a tightening of global financial conditions. Under these circumstances, the U.S. Federal Reserve seems unlikely to increase its policy rates anytime soon, in contrast to perceptions after its last meeting. The outcome will also make interest rate normalization in the U.K. and elsewhere an even more distant event. Government bond yields look bound to remain at historically low levels for a long period of time.
Under Pressure
The outcome of the referendum is strongly negative from a Swiss perspective, and will put the SNB under intense pressure. It will trigger massive political uncertainty about U.K.-EU political relations. While the longer-term economic impact of the vote has been exaggerated by the Remain side during the campaign, the uncertainty will depress asset prices and economic growth in the U.K. and the euro area, and will spill over to Switzerland. Safe haven trades will put the franc under heavy upward pressure and depress Swiss bond yields.
The outcome of the vote will have large implications for euro sceptic and nationalistic political parties across Europe. There is a risk that political momentum will build for other countries to hold referenda on membership in the EU. It will be difficult to maintain the notion of business as usual in the EU after U.K. voters have decided to leave the union. Market volatility seems set to remain high for an extended period of time.
Stefan Gerlach, a dual Swedish-Swiss citizen, has been the Chief Economist at BSI Bank since the beginning of this year. Previously he worked for four years as one of two Deputy Governors of the Bank of Ireland and before that at the Bank for International Settlements and as Chief Economist with the Hong Kong Monetary Authority.
