Global market indexes and the pound sterling plunged today after United Kingdom voters voted to exit the European Union. This highly unanticipated outcome reinforced concerns about the EU’s political stability and creates vast uncertainty about the future of the United Kingdom’s economy, Europe’s second-largest. Toward the end of the market day, six out of the eight most active U.S. stocks were metals stocks, and the two nonmining stocks were Altria and Kroger. All of them were positive. This is about as defensive and scared as a market can get.
What We Know
The current British Prime Minister, David Cameron, actively campaigned for Britain to remain in the EU. Within hours of announcement of the referendum, he announced his intention to step aside. This will allow a new prime minister more sympathetic to the Leave movement to manage Britain’s exit.
The timeline will formally begin when Britain invokes Article 50 of the Treaty on European Union. The EU and Britain will have two years to negotiate a highly complex separation, after which the separation becomes automatic unless all member states unanimously agree to extend the deadline.
What We Don’t Know Yet
Though the voters have expressed their desire to leave, we do not yet know when Article 50 will be formally invoked. The longer Britain waits, the more time it has to begin informal negotiations that will not trigger the two-year hard deadline. Some British politicians have said that it would be irrational to rush to give notice, while others want to do so immediately. European Union leaders have said that as much as they hoped the vote would be to remain in the EU, they now demand the process to begin quickly to reduce uncertainty.
What I Speculate
Many economists have warned that a Brexit would lead to Britain losing trade opportunities with the EU. Brussels (the location of the EU’s headquarters) will be as punitive as possible against Britain to deter other member states from holding referendums of their own and the EU eventually falling apart through a domino effect. Though this sounds plausible, two years of negotiations will allow tempers, egos and fears to cool. Ultimately, the negotiating parties will do what is in their own interest. I suspect fears over EU retaliation are vastly overblown, though it may not seem that way once negotiations do begin. Today’s market chaos alone will certainly encourage other countries to think carefully before rushing to follow Britain’s example.
Time to Pounce?
If one of your buy candidates fell because of the Brexit panic, be ready to buy (is that a Brentrance?) on Monday — but be careful you don’t buy into a fast market. Traders may take a big breath over the weekend, realize little has changed and bid the market higher. Monday will likely be a big volume day and any market order might be executed far away from the expected price.