Keep Calm and Carry On Mark Pickering markp@arlingclose.com

  • The United Kingdom has voted to leave the European Union, which will lead to short to medium term volatility, and a probable weakening of the UK economy. The long term affect is still uncertain, and may be less severe than many suggest.
  • The overall margin of victory of 52% to 48% masks significant regional variations, with London, Scotland and Northern Ireland all voting to remain overall, and Wales and England voting to leave.
  • Sterling has suffered its largest fall in its history, and is at its lowest level against the dollar since 1985, it is currently at $1.36, and may fall further.
  • Gilt yields have fallen sharply as investors rush to quality, with reductions of around thirty basis points across all maturities.
  • The FTSE 100 is currently down 8.5%, with banks down 30%, and other financial services and housebuilders amongst the hardest hit.
  • UK GDP is likely to be reduced from previous forecasts, with a reduction of 0.5% for the year, and likely lower than expected growth in 2017.
  • In the near term, the timetable of David Cameron’s departure, the decision to trigger article 50 once a new Prime Minister is in place and the Bank of England’s response to market turbulence will be the most important issues to watch.
  • The sharp decline in sterling should increase inflation from its current low level in the shorter term and help to insulate the export sector from to0 harsh a shock, though the affect may not be as pronounced as when the UK left the Exchange Rate Mechanism in 1992.
  • The MPC is likely to meet in a special session before its scheduled 14th July Meeting, to discuss possible interest rate changes and increases in quantitative easing. We believe that they will look through any spike in inflation  and that rates will continue to be low for longer.
  • In the longer term, fundamental issues such as what trade arrangements the UK is ultimately able to negotiate and the effects of Brexit on the City of London and the wider economy including the public sector will dictate the effect on the UK.