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Brexit Result

Friday, June 24, 2016

THE RESULT

The result of the Brexit referendum has been a vote to leave the EU with an estimated 51.9%/48.1% split. Following the vote to leave, it is not certain when the UK will officially notify the EU of its intention to leave under article 50 of the Lisbon Treaty after which it will have two years to negotiate new trade agreements.

MARKET REACTION

The initial reaction in markets has been negative with Japanese equities down approx. -7.9 (approx. -3.5% in €) while other Asian markets were down approx. 4/5% (-2/3% in €) overnight. UK equities are currently down -4.5% (-9.5% in €) compared to the futures market indicating falls of up to 10% prior to opening this morning. European equities are down approx. -7%. The US equity market is opening down -2.5% after earlier indications in the futures market of being down -4%.

Sterling has fallen approx. -7.7% against the US dollar to 1.365 having hit its lowest levels since 1985 earlier this morning while it has fallen approx. -5.5% against the Euro to approx. 0.809. The Euro has fallen approx. -2.8% against the US$ to 1.103.

Overall, while remaining weak, equity markets have not deteriorated further from their opening levels or early morning indication levels and if anything have recovered slightly. At current levels, global equity markets are down approx. -4.25% in local currency terms on the day or approx. -3.25% in Euro terms.

German 10 year bund yields earlier fell to new record lows of -0.16% although have since rebounded to -0.07% while peripheral spreads against Germany have widened to approx. 160bps, up approx. 30bps on the day having widened earlier to a peak of 200bps, the highest levels since early 2014.

Markets are expected to remain volatile in the short term and may take some time to settle and find levels where they stabilise. The initial market reactions appear close to what would appear justified on a fundamental basis but given the outcome was a surprise compared to investors’ expectations immediately prior to the vote, some additional market weakness could be possible from current levels although should be limited.

ECONOMIC IMPACT

The outcome of the referendum is expected to result in a significant slowdown in UK economic growth with a recession possible over the next year as consumption and investment activity are likely to be reduced. It is possible that the London financial industry could be particularly negatively impacted by the lack of access to European markets post the exit with many international operators indicating prior to the vote that they would reduce their London presence if the vote was to leave the EU.

The economic impact on Europe post the expected slowing in UK growth is expected to be in the region of -0.2/0.4% over the next year, resulting in still positive but modest growth of around 1/1.5%.

The lower growth outlook across the UK and Europe an expected flow through to global growth given the associated levels of uncertainty limits the scope for any significant recovery in equity markets, notwithstanding any policy monetary or fiscal responses.

Ireland is seen as one of the more sensitive European economies to slower UK growth with approx. 15% of Irish exports to the UK. Some offset however could be evident with a possible redirection of Foreign Direct Investment previously intended for the UK to Ireland. The impact on Irish GDP growth could be in the region of approx. -0.5%/1% which would leave Irish GDP growth still relatively strong at about 4%.

CENTRAL BANKS RESPONSE

The Bank of England has indicated it is monitoring the situation and has contingency plans in place including the provision of additional liquidity and other facilities to minimise any negative impact. No immediate policy response is expected from the Bank of England but following a review of the impact on the economy and markets, easing measures in the form of interest rate cuts and a renewal of asset purchases are possible at some point in coming weeks.

The ECB and other global central banks are also closely monitoring the impact of the vote and are expected to respond as deemed necessary with additional stimulus likely from both the ECB and Bank of Japan in particular. The US Fed is likely to remain on hold with regard to interest rates rather than raise them further as previously planned.

DEVELOPMENTS TODAY

Prime Minister Cameron has announced his resignation and expects a successor to be in place by October, indicating it will be the responsibility of the new Prime Minister to officially inform the EU of the UK’s intention to leave the EU under article 50 of the Lisbon Treaty.

There have been suggestions that leaders of the leave campaign intend to complete advanced trade agreement negotiations before activating article 50.

German Chancellor Angela Merkel has urged calm and composure following the result and encouraged the EU to maintain close future relations with the UK following the referendum. She intends to discuss the referendum result with leaders of France, Italy and EU Council President Donald Tusk on Monday.

Donald Tusk this morning has suggested a wider reflection on the future of the EU post the result.

In Ireland the NTMA has said it will monitor developments in bond markets in coming days and weeks while highlighting its strong funding activity already year to date and its €10bn cash position. It will update on its funding plans for Q3 on July 1st as originally planned.

LONGER TERM

Over the medium to longer term, the vote raises questions about the long term future of the EU and Eurozone with the possibility that other countries may at some point in the future seek referendum to vote on their membership of the EU. These are not expected in the short term but much will depend on the response of the EU itself as to how it plans to improve integration and co-operation among remaining members of the EU.

NOTE

Please note markets remain very volatile, we will keep you informed of events as they unfold and please contact your Irish Life relationship manager at any time

Time: 2.40p.m.                                                                                              24TH June 2016

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