–At the open in London last Friday, the first time UK stocks could react to the “Leave” vote on Brexit, the benchmark FT 100 index plunged by about 10%, to a low of 5788. It spent the rest of the day recovering something more than half those losses. Today, the index is inching lower again, something I suspect will eventually result in a test of the Friday lows. If I were forced to make a bet, I’d say the index ultimately bounces off that low rather than falling further. During this time, the market will likely also reorient itself to favor beneficiaries of Brexit and penalize losers from it.
I’d prefer to stay on the sidelines and watch.
–To me, the more striking–and probably more permanent–feature of the market reaction to Brexit is the close to 10% fall in sterling that the “leave” vote has triggered. This offsets some of the harm done to exporters by placing them outside the walls of the EU, and thus subjecting them to the extra costs of tariffs and regulatory red tape. But it also means an immediate drop in the standard of living of ordinary citizens, by raising the price of imported food, clothing and fuel. We can look to Japan, which is suffering from double the UK level of currency decline, for insights into what this implies.
–It’s already appearing that Brexit will be a less cut-and-dried affair than I had imagined. There appears to be plenty of parliamentary room for following the letter of Leave while retaining the substance of Remain. We’ll see.
–Post-vote polling shows not only strong pro-Remain sentiment in Scotland and most urban areas in the UK, but also a very large age difference in voting patterns. Support for Leave was strong among those over 50, with those over 65 intensely in favor of exit from the EU. Younger citizens were equally strongly in favor of Remain. The actual voting tally implies that the former group was out in full force on Thursday, while about half the latter neglected to cast a vote. …a cautionary tale for the US?
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There is a strong possibility that the people will demand the referendum. Brexit was a decision by the people and in the end it can be revoked by the people. The current decline in the sterling will make imports expensive and those Spanish holidays a tad too much for the average household. The sterling exchange rate has not priced in the Article 50 yet, when that is triggered we can expect a 5% drop.