Market Reviews / Published on .

Brexit (British Exit)

It's done. The British have voted to end their partnership with the European Union (EU) and its 27 other members. The gamble of Prime Minister Cameron (who has already announced his resignation) proved to be a resounding failure with 51.9% in favour of leaving the EU and 48.1 % against the move.

As always, in such circumstances, you have to step back to analyze and understand the issues surrounding this type of event, its direct impact and its collateral effects (because there are many). A key factor that tipped the vote in favour of "leaving" is that, according to separatists, immigration will be easier to control if the United Kingdom (UK) is independent from the EU.

The procedure for leaving the EU will be long (according to Article 50 of the Treaty of Lisbon, it must take two years) and is not necessarily very clear, since it is the first time this type of situation has ever occurred. In addition, it appears that the "remain" camp have not had their last word. In Scotland, where the vote was predominantly for remaining in the EU (68%), there's already talk of blocking the process.

The impact on world markets was immediate and brutal. The pound lost 8% (against the US dollar) and the benchmark index of the British stock market fell 2.3% (in local currency terms). Other stock markets were hit harder: the French CAC, German Dax and Japanese Nikkei fell about 8% (in local currency terms). In addition, the Dow fell 3%. In Canadian dollar terms, the declines were quite dramatic when you factor the impact of currency fluctuations into the market equation.

This situation could lead to a possible downgrade of the UK's AAA rating and the need to plan the next steps. It will be important for the country to renegotiate not only with the EU, but also with every country with which it has business ties, which may cause an economic slowdown. For the London Stock Exchange, the effect could be positive in the medium term, since it is composed of large multinationals that benefit from a weaker currency.

For the EU, the new challenge is now the risk of contagion to other member countries. There's already discussion of this sort in the Netherlands, Italy and Sweden. Nationalist parties are playing the immigration and globalization cards as the roots of all evil. Europe seemed to be on track, with concrete signs of economic improvement and more stable stock markets. But these new political crises on the horizon could paralyze the EU economy, making it lose some ground.

In the short term, calm will eventually return to the markets, but don't be surprised by major central bank announcements to minimize market volatility and further support the global economy.
This situation is still ripe with uncertainty, so we will continue to actively follow it and keep you informed.

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