4 reasons markets are reacting violently to Brexit

brexit markets
Global Equity Markets after Brexit. Credit: The Guardian/Thomson Reuters

$2.08 trillion dollars was wiped off global equity values after Brexit. This was the worst daily loss ever. Worse than any before it and hopefully any to come after it. But why was this  a bigger loss than the collapse of Lehman Brothers during the financial crisis of 2008? I will try to explain.

1. Overconfidence. The tragic murder of Labour MP by an alleged far-right activist convinced many watchers that the Leave campaign’s momentum had been halted. Many then believed that the vote was surely going for Remain. Betting markets, pollsters and apparently traders (since the pound hit a high of $1.50) were sure of a Remain win. And so the results from Sunderland showing a 69% win for Leave sent the pound sinking below $1.43, the fastest 700 pip movement I have ever seen. Below is my chart from that day.

gbpusd

The groupthink that a Remain victory was inevitable had set many people on the side of a bad trade and stocks just kept on losing as people tried frantically to close their positions. Had more people seen Leave as a serious threat, we may not have seen such losses.

2. Brexit could be the start of the end of the EU. The political and economic impact of Brexit on the UK would be large but there are many valid fears that its impact on the rest of Europe would be larger. The celebration of Brexit by Marine Le Pen, Geert Wilders and other xenophobic and euroskeptic politicians across Europe is an indication that Brexit is a victory for parties which are seeking to tear the EU apart and that they may be on the rise.

3. Donald Trump. The Donald was in the UK on Friday to congratulate the Brits for “taking their country back”. Brexit has given Trump and his supporters a psychological boost and he may well be headed for the presidency. A terrible thought for many.

4. The world doesn’t make sense anymore. Welcome to a world where the experts are as bewildered as the rest of us. Ever since the great recession in the USA, western countries have been pursuing near zero and even negative interest rate policies and yet inflation is far behind target, growth is poor and jobs are few. This has been very challenging to a lot of views about how economies work. Now adding to that confusion is Brexit and Trump’s win in the GOP primaries – two events people thought were impossible happening in quick succession. What is next? Scottish Independence? Resumption of hostilities in Northern Ireland? Nobody knows. In such an environment people save instead of spend, businesses don’t invest and economies stall. The uncertainty is sure to last for long and that’s why markets panicked so much.

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Jerome Kuseh

Financial Analyst | Accountant | Private Investor
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