The U.K. voted to leave the European Union after more than four decades in a stunning rejection of the continent’s postwar political and economic order, sending shock waves around global markets. David Cameron resigned as Prime Minister, the British pound plunged to the lowest since 1985, stocks tumbled around the globe, and U.S. Treasuries surged, sending the 10-year Treasury yield down to about 1.40% in early morning trading – just a shade above the all-time closing low of 1.38% struck in July of 2012.
The vote to exit sets the U.K. up for bitter divorce talks with the EU, which could potentially drag on for years, and tips the country a step closer to recession. JPMorgan Chase & Co. and HSBC Holdings Plc have said Brexit would lead them to move thousands of jobs out of London.
The results of the British vote may also empower populist parties in other EU nations to also pursue an exit vote. Above all, the outcome shows just how disillusioned Western voters have become with the political establishment for failing to deliver more inclusive economic growth in the era of globalization. The biggest fear among investors is the contagion that a British exit from the EU will have across Europe.
The U.S. market has been a relative safe haven leading up to the Brexit vote, with the S&P 500 trading less than 1% below its all-time high. U.S. markets were poised to breakout to new highs, participation was widening and the NYSE advance-decline line was at all-time new highs. In the short run, this positive momentum will likely be derailed, but we believe the secular bull market remains intact and that the temporary weakness created by the exit vote will present opportunities along with the obvious challenges.
Central banks will likely flood the markets with liquidity given the spike in volatility and a July Fed rate hike is now definitely off the table.
History reveals that geopolitical events typically don’t drive the long-term direction of the U.S. stock market. Nonetheless, they can have a short-term psychological impact on investor confidence. We remain keenly focused on the repercussions that the vote may cause and will position our strategies accordingly.
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