Britains Vote Shocks Markets

Image source:

What's going on?

Britain has voted to leave the European Union and markets around the world are in turmoil. The UK pound is down about 7% versus the US dollar, European stocks are about 8% lower and early trading suggests that US stocks will fall more than 3% once markets open in New York. Suffice to say: this is a big deal!

What does this mean?

Right now, its all about the short-term impact on the markets. Investors usually hate uncertainty and the immediate reaction is to sell riskier investments (like stocks) simply because they dont know whats going to happen and they want to play it safe. Theres a lot of uncertainty over Britains future relationship with the European Union (EU) and how that will affect both Britain and Europes economy (and the stability of the EU itself). And a selloff has the potential to snowball: investors get afraid of catching a falling knife, e.g. they get afraid of buying something that could keep falling in price (although, in hindsight these situations often present attractive buying opportunities).

Why should I care?

The bigger picture: This vote undermines the EU and the Euro. Some investors fear that the Brexit vote could lead other countries to think about leaving the EU. That risk will likely be reflected in the market. For example, government bondsof riskier European countries, like Spain and Portugal, could sell off and/or investors could become more wary of the health of European banks. Those are the sorts of systematic risks that are important for global investors to consider.

For the markets: For global investors, the short-term is likely to be much more important than the long-term. This is, obviously, a huge deal for Britain and a big deal for Europe. But Americans (and others) will be asking, does this really matter to our markets? In the short-term, it definitely does: the biggest question is if, when and how global markets stabilize. But the impact on the actual economy, outside of Britain and Europe, will arguably not be material – and global stocks should eventually reflect that.

Originally posted as part of the Finimize daily email.

The top 2 financial news stories in 3 minutes. Join over one million Finimizers

Read next

Tech IPO Goes Nuts On Day 1

Sign up to Finimize

Get the two most important global financial news stories each day. Sent at midnight UK time.

Get started with one email a day

The top financial news stories in 3 minutes.