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Brexit Wiped Off Trillions

Brexit Fallout

Image source: Yuri Turkov / Shutterstock.com

What's going on?

Following the Brexit result on Friday, $2.1 trillion of value was wiped off stock markets around the world. There is much to digest as investors brace for a turbulent week ahead.

What does this mean?

There were big moves on Friday – but nothing appeared to fundamentally shake the markets. When the US investment bank Lehman Brothers went bankrupt in 2008, there were many systematic risks: the very ability of markets to operate was in serious jeopardy. On Friday, nothing like that seemed to be occurring. The whole financial system appears to be in healthier shape now (for example, banks are holding way more cash relative to the money they have lent out) – and that should allow markets to continue to function in a relatively normal manner, albeit still with potential big price changes.

Why should I care?

For the markets: Investors are worried about the impact of the vote on the eurozone. Markets will be looking for signs that other countries might vote to leave the European Union and stop using the Euro as its currency (e.g. Italy). That could destabilize the Euro as a currency as the process by which a country would leave the eurozone would be fraught with difficulties (remember all the fuss about Greece possibly leaving last year?).

The bigger picture: The Brexit vote has reminded investors of the importance of political risk. Unexpected political outcomes have the power to shock markets. As the US presidential election approaches, political risk will be in the spotlight to an even higher degree. Investors and businesspeople are, in particular, wary of Donald Trump’s plans to limit trade with other countries such as Mexico and China – thereby, likely, hurting the US economy and the profits of many US-based companies.

Originally posted as part of the Finimize daily email.

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