Risks in post-Brexit financial markets in 2016

The British referendum in favour of Brexit or “British Exit” is now at the heart of world economic news. Indeed, this vote has and will have significant impacts, the actors already expect serious consequences on the financial markets. But what are and would be the risks of this British exit from the EU in 2016?

A post-Brexit uncertainty

According to the International Monetary Fund (IMF), it is the post-Brexit uncertainty that constitutes the main risk associated with this breakdown. In May 2016, IMF President Christine Lagarde had already expressed concern about the impact of Brexit on the global economy. And today, after the confirmation of the “yes” vote in the referendum, IMF spokesman Gerry Rice said that the current uncertainty is the most feared risk to the global economy while at the same time a factor that could slow growth in the short term.

The United Kingdom is, of course, at the heart of these likely consequences, but other countries in Europe and around the world could also be affected. In response to this situation of uncertainty and given the already declining global economic growth, the IMF spokesman called on political leaders to take decisive action. However, no detailed points were mentioned.

However, after the vote on 23 June 2016, the United Kingdom and the European Union opened discussions, in particular as regards their economic relations and British access to the European market. However, to date, no measures have been put in place. The official release date from the United Kingdom is not yet known.

High market volatility

For some time now, financial markets have been subject to significant volatility. In particular, the pound has been at record levels since the crisis and, particularly with this exit from the European Union, one could still expect a higher level of instability. According to several financial institutions, the pound could be devalued by 20% on the market. Investors thus remain in a total phase of uncertainty. As a bonus, this volatility would not only affect neither the United Kingdom nor the foreign exchange market, but could also affect other assets on the international market. In particular, the International Monetary Fund has indicated that this British secondment to the European Union could lead to a real collapse of the equity market.

In addition to Brexit, other factors of financial destabilization are also present, including the probable presidency of Trump in the United States. At the moment, the presidential candidate is indeed at the same level as Hilary Clinton in the polls, but according to various financial players, including Nomura, this Republican nomination could lead to even greater volatility in the market. As Trump’s main lines are mainly focused on immigration and trade, its policy could have an impact on interconnected financial markets. And, in addition to currencies and equities, commodity markets could also be severely affected.

post brexit

Destabilized markets

A strong dollar

This year 2016 is also marked by a strong dollar, which, according to the research director at the Bank for International Settlements (BIS), Hyun Song Shin, would herald “hidden tensions”. According to Shin’s explanations, a strong dollar is often a precursor to anomalies that could be devastating for financial markets. Implicit interest rates in foreign exchange markets, which should go hand in hand with market interest rates, do not correspond. This could lead to significant destabilization. According to BIS, these anomalies would be a real threat to the tranquillity of the financial markets.

A devalued renminbi

And then, since the beginning of 2016, the renminbi yuan has also experienced a significant decline. The movements on the equity markets are mainly responsible for this devaluation of the yuan. After a period of calm, the currency fell sharply in May. A weakness that has already started since August 2015. Faced with this devaluation of its currency, the People’s Bank of China would then intend to direct its currency towards the markets. A decision that would have been quickly abandoned, according to the Wall Street Journal report, according to which China had opted for more price stability.

Brexit, a green light for other countries?

Finally, it should be stressed that, in addition to the various movements taking place on the financial markets, another point not to be overlooked is the influence of this Brexit on the other Member States of the European Union. This departure from the United Kingdom could indeed lead other countries to also want to resign. And, if this is the case, significant changes will automatically occur in the markets. Of course, we do not forget to mention the case of Greece, whose situation is considered “threatening” in financial terms. Grexit would be likely in 2016-2017, and indeed, the country could leave without delay after this British initiative. Business to be closely monitored…