Brexit - The Aftermath

Yes, Brexit was a disaster for capital markets ... but mainly because most traders did not hedge their positions for such an eventuality. Most traders assume the Brits would never do something so silly. Yes, it is silly because Britain has a 75% export market and depends on the union in more ways than one.

London as the financial centre has been magnified for the past 10-15 years thanks to the free movement of labour, capital ... the flow on benefits of that cannot be minimised.


WHAT IS LIKELY TO HAPPEN

- REGRET: More and more Brits will regret their decision. There will be movements to garner sufficient support for a second referendum - even though that is not written in stone, it could be debated in Parliament if there is sufficient pressure.

- POLITICAL WILL: Cameron did what I considered the smartest chess move, and swiftly too, by resigning immediately. He is basically saying, you want to eat shit, then I am not going to be the one to open the door and scoop the shit. No wonder Boris looked like Becker having lost Wimbledon yet again. Boris should be celebrating but with Cameron's resignation, he is in line to be the "the leader" and its really a no win situation for Boris of London. If you look around, none of the vocal Brexit leaders are now trumpeting to invoke Article 50 immediately. This is the classic case of "be careful what you wish for, cause you buggers do not know what to do when you have it".

- E.U. STANCE: The 6 foreign ministers of EU came out strongly to basically ask Britain to move quickly to exit. That might be a surprising stance to many but its a calculated stance to stand strong and send a signal to other nations wanting to leave the union. Its still a stance.

- This will lead to a discordant British society with youth vs seniors, as the majority of the seniors voted for Brexit while the majority of youths voted to remain. Looking at actual impact, most youths have another 40-60 years to live with the decision while the seniors have between 5-20 years. You do the math. As you stop people from coming in, you also limit the "opportunities" to work in the rest of Europe. There are also many British retirees in Spain, Portugal and Greece ... I think they will make it tougher for these seniors to retire there soon.

- OTHER EXITS: Naysayers will cite that now more countries will go for the referendum route to exit EU. Well, thats a probable route because most right wing parties in every country will try to jump on the bandwagon. Again, we have to look at this logically. Not every country want to leave the union as they are in a position of weakness in economic terms, structurally and being too inter-dependent on the union.


WHAT IS REALLY REALLY LIKELY TO HAPPEN

- Both side will quickly try to negotiate a "new treaty" ala Switzerland, Norway. The EU really really needs Britain to be in at least in economic terms. If Britain can get some new terms in free movement of labour, I think that can sway the way for a second referendum. If you look at it, both sides really want to be in. Even Brexit leaders will concede that much if the terms can be changed somewhat.

- At the end of it all, its the immigration issue, nothing else. Maybe a special passport will be needed for other Europeans wanting to work or stay in London. Actually its not that difficult. Just accept Temporary Resident, renewable for every 3 years, provided they have a proper job offer. And they must leave the country within 3 months if they do not have a job anymore.

MARKETS

- Very hard to try to discount when there are still so many permutations. To try and guess, will make you making good money or lose a ton of money. If thats the kind of bet you want, go ahead. But if I am forced to bet, based on the arguments above, I'd bet for sanity to prevail and the human will to survive and reconnect - bullish, even though its mad-like bullishness.

Remember that, when presented with a great unknown with an equal amount of uncertainty, markets will discount down and will overshoot. The 'what mights' are all tainted with worst case scenario ... but we should look at what is probable given that people will make decisions based on new evidence on the table, and new evidence is neither Britain nor the EU liked the ramifications. Thus safe to say, it is likely both sides will try and hammer out something which will keep the EU intact - because a nasty breakup will cause EU to disintegrate, and Britain will be whiplashed terribly being an export reliant market (to EU mainly).

Source: Malaysia-Finance Blogspot

Here’s everything you need to know about 'Brexit'

You may not have to worry about this for long. But through June 23, investors should devote a share of their attention to the European parlor game known as “Brexit.”

On June 23, British citizens will vote on one basic question: Should the United Kingdom remain in the European Union, or leave? If they vote to stay, global markets will breathe a sigh of relief and go back to business as usual. But if BRits vote toEXIT the EU – Brexit, get it? – it will trigger a realignment of Europe’s financial sector and cause the kind of uncertainty that makes markets manic.

The European Union is a group of 28 countries that have agreed, over time, to abide by certain rules that supercede each nation’s own rules and laws. This is mainly to facilitate trade and commerce in ways that make each signatory country better off. In principle, the EU supports “four freedoms”—the free flow of goods, services, workers and capital among all 28 countries. There’s no analog in the United States because all of those things can already move unimpeded from state to state.

The EU is different from the euro zone, which is a group of 18 countries that have adopted the euro as their currency, including Germany, France, Spain and Italy. The UK does not use the euro, nor do other EU countries such as Sweden, Poland or Hungary. Nations can still benefit from membership in the EU while retaining their own currencies.

Rising immigration levels

European governance can be arcane, but the main reason for the Brexit vote will be familiar to many Americans: concern about immigration. EU rules allow any citizen of an EU country to live in any other EU country and enjoy most privileges of citizenship, including social services. In recent years, there’s been a sharp jump in the number of people coming to the UK from other EU nations, including newer entrants such as Romania and Bulgaria. Some native Brits feel immigrants are collecting an unfairly large share of welfare payments and child benefit payments, which has become a touchy political issue, much as it has here in the United States.

While running for reelection in 2015, Prime Minister David Cameron vowed to cut the net inflow of people to the UK to less than 100,000 a year. Last year, however, that number hit 330,000. Cameron, who staunchly opposes Brexit, also made a campaign promise to hold a referendum on the matter, which is what is happening on June 23.

Polls suggest the vote will be close, but polls have been wrong before. When Scottish citizens voted on whether to secede from the UK in 2014, many polls forecast a tossup and a few predicted Scottish secession. But Scots ended up voting 55% to 45% to remain part of the UK. Pollsters point out that voters tend to become more conservative, and side with the status quo, as voting on a controversial topic nears.

How will markets react?

If Brits vote to stay in the EU, markets could rally, since they’ve been falling on concern about what sort of turmoil a Brexit vote could unleash. The UK might stil try to renegotiate certain agreements with the EU, but markets would barely care.

The troubling scenario is a vote for the UK to leave the European Union, which would cause all kinds of unpredictable fallout. An actual departure from the EU would take a minimum of two years, with procedures worked out slowly. The impact on the US economy would be minimal, except for financial markets, which could stagger while investors try to sort out the implications. The dollar would probably strengthen as investors bought US securities as a hedge against European turbulence.

Once out of the EU, the UK would no longer benefit from free-trade provisions among EU countries or with other nations governed by EU deals. That means it could either negotiate trade deals one-by-one with its European neighbors and other countries, including the US, or do without trade deals. That's what President Obama was talking about when he said Britain would move to the "back of the line" if it left the EU. There would also be strong pressure from some domestic industries, such as steel, to impose tariffs on imports, which would push up prices in the UK and invite other countries to retaliate on imports from the UK. And trade wars rarely make everybody better off.

London is a world hub for finance, and there would be immediate pressure on big European banks to move investment banking, trading operations and other activities out of the UK and into other countries fully integrated with the EU. This might actually benefit financial hubs such as New York, which could gain a competitive edge if Europe’s financial capital splinters into several smaller ones.

Other EU nations, which have their own anti-immigration political factions to contend with, would probably make Brexit painful for the UK. “This will not be an amicable divorce,” Jacob Kirkegaard of the Peterson Institute for International Economic said at a recent conference. “The probability of punitive political actions by the rest of the EU is a very strong base case,” It could become much harder for Brits to work and live legally in other parts of Europe, for instance. Brits who retire in sunny locales like Spain or Cyprus -- the European equivalents of Florida or Arizona -- might find they’re no longer able to receive government-provided healthcare in their new locales, a perk of EU membership.

The consequences of Brexit would land a lot harder on the UK than on the rest of the world, however. “I have trouble fully understanding why some of the major economies think this is a systemic risk,” says Adam Posen of the Peterson Institute. Even in the worst-case scenario, banks, multinational companies and government regulators would have plenty of time to adjust. The Federal Reserve and other central banks would be able to intervene, if necessary, to keep markets stable.

If the Scottish vote is any guide, none of that will happen. Even the Greek financial meltdown, caused by profound economic problems, got resolved last year after familiar down-to-the-wire wrangling. So the 2016 Brexit vote may turn out to be nothing more than Europe’s annual scare. Just be ready in case this time, it’s real.

Source : Yahoo Finance