The Impact of UK Referendum on Financial Markets :: Wamhoff Financial & Accounting


The Impact of UK Referendum on Financial Markets

On Thursday, June 23rd, the United Kingdom will hold a referendum where citizens will vote on whether to leave or remain in the European Union. The outcome of this referendum has the potential to move global financial markets around the world. Kyle Jones, Financial Advisor at Wamhoff Financial Planning & Accounting is here to discuss the possibilities this vote could have on financial markets.

Why is the referendum being held?
• In the 2015 general election, Prime Minister David Cameron promised to hold a referendum if he won the 2015 general election.
• The argument made by his own Conservative Party and the UK Independence Party (UKIP) argued that Britons had not had a say regarding their involvement in the European Union since 1975.

What is ultimately impacting financial markets relating to the referendum?
• Many European economists believe the most likely impacted asset would be the British currency, known as the pound sterling.
• Many economists and investment strategists believe that should Britain leave the Eurozone, the pound would fall dramatically in value. Target Date Fund – many plans feature target date funds in which your risk is calculated and adjusted over time based on your age.
• Additionally, there is also the potential for Britain’s credit to be downgraded which could cause interest rates in the United Kingdom to rise.

Why does this referendum have a major impact on global financial markets?
• Currency markets impact price action in global financial markets world-wide. If the pound is falling, it is likely that other currency would rise against it including the U.S. Dollar.
• Currency markets impact price action in global financial markets world-wide. If the pound is falling, it is likely that other currency would rise against it including the U.S. Dollar.
• Currency markets, debt markets, and equity markets are likely to be impacted.
What investment might benefit from a lower British pound sterling?
• While a decline in the pound could be good for United Kingdom based multinational companies as the weaker currency would help boost revenues made outside the country.

What investments or sectors might be damaged based on a lower British pound sterling?
• Specific sectors of the British economy would likely suffer.
• The most likely sector to suffer would be the banking sector. Should banks begin to see selling pressure in Britain, banks around the world could come under pressure due to their interconnected nature.
• As a result, what is bad for banks in Europe could be bad for banks in the United States. Traditionally, if financial stocks are under selling pressure the larger stock market indexes typically follow suit and weakness permeates the entire marketplace over time.

What do the polls currently indicate:
• At this point in time, many of the polls are within the margin of error and the outcome is unknown.
• Based on recent financial market action, if Britain remains it should be positive overall for risk assets globally.
• However, if Britain leaves the Eurozone it is possible that financial markets will see strong selling, particularly in the value of the British pound, British government bonds, and British banks.
• The other concern is that if Britain leaves, other European countries will also leave shortly thereafter and the European Union could face significant bureaucratic disruption.

http://www.bbc.com/news/uk-politics-32810887
http://www.economist.com/blogs/buttonwood/2016/03/brexit-debate-1
http://www.zerohedge.com/news/2016-06-20/cable-pumpsndumps-latest-polls-telegraph-backs-leave