Brexit questions and what it means for us
Last Friday, against market and bookmaker views, the UK voted to leave the European Union. David Cameron (UK PM) resigned instantly and it appears Jeremy Corbyn’s position as opposition leader is no longer tenable as 11 of his shadow cabinet have resigned in protest. A new Prime Minister will be announced by September 2nd and it is expected they will enact Article 50, the EU clause that allows for two-year negotiations to begin for the exit. Europe is wanting a quick exit, the UK is not willing to rush as it appears the Leave campaign wasn’t actually expecting to win. Some points to note:
- This isn’t a credit event like the GFC. It will take a long time to resolve itself. The world’s fifth-biggest economy (UK) is currently without leadership . The ratings agencies have downgraded the UK from AAA to AA–. The UK current account of 7% comes into real focus when politics aren’t working to find a solution.
- It isn’t just a UK problem. Europe will be caught up in the mess as well, and already people are calling for referendums within the EZ to leave. Growth will be lower and downside risks are more pronounced.
- In times of crisis money leaves risky trades and moves to safe havens. Equities have been sold oﬀ on lower growth prospects. Bonds have been bought driving rates lower across the globe. 10yr Bunds are NEGATIVE .11% US 10yr are 1.4%. Investors are looking for places to park money with a good story.
- Enter Sugar: With a good macro story and a supply/demand profile that isn’t correlated with global macro markets, sugar has potentially found new additional demand.
- Currency markets are reverting to being an ugly contest. At the moment, the USD is probably the least ugly with money moving into the USD from Europe and other risk on type currencies (AUD, NZD). Rate hikes in the US are likely oﬀ the table this year.
- The impact of all of this will be lower growth across the globe and higher volatility, but this is much more a European than Asian issue. Australia will be driven much more by domestic issues (election and commodity prices) than the results from the Brexit and potential break up of the UK.