Ever since the vote to leave the EU back in June, there’s been a lot of talk about the sort of Brexit the UK would undergo.
It’s becoming increasingly likely that a so-called ‘hard Brexit’ is on the cards. After all, by sticking to her guns on a stringent immigration clampdown, Theresa May will struggle to convince her European peers to provide single market access.
But a hard Brexit might not be the toxic event central bankers initially forewarned. In January, Bank of England governor Mark Carney recognised that the risks to financial stability will be felt by EU countries more keenly than by Britain itself. This could prove crucial for companies operating in the UK.
There may be time before Article 50 is triggered, but the atmosphere on both sides of the negotiating table seems unlikely to transform. Even a best case scenario, then, is likely to spark volatility and a great deal of uncertainty in the markets.
Sterling fell sharply in the wake of the Brexit vote, and by the beginning of November it had sunk lower still. While we’ve seen moments of recovery over the last couple of months, we’ve also now seen how quickly this will evaporate: the pound has once again dropped away as the prospect of a hard Brexit builds.
The UK Treasury and the Bank of England have tried to reassure investors about the underlying strength of the UK economy, but the BoE was still forced to cut interest rates in August. Any further cuts, or more drastic action like QE, will have their own consequences for Britain’s currency.
Whether sterling recovers is dependent on how Britain’s economy is shown to be faring as Brexit takes its course, and how the Bank of England reacts. In the meantime, British exporters will welcome any weakness in the pound. For consumers, it may be another story, with further drops pushing up the price of imports, fuel and foreign travel.
Gold once again became a safe haven after Britain voted Brexit, with the metal climbing above $1300 two weeks after the vote. However, the good times were short-lived. At the beginning of October, it was back down to pre-vote levels, and by the end of December, gold had fall to its lowest level over ten months, after the Fed announced a rate increase.
As Brexit comes into clearer focus, any disastrous news for the UK economy or EU stability might well offer a boost to gold. But traders will likely be paying more attention to the impact of these Fed policy decisions – and Trumponomics – than what’s going on in our neck of the woods.
Stocks across the globe fell in the wake of the vote, but European and UK companies were particularly badly hit.
The mid-cap FTSE 250, with more companies reliant on the domestic UK economy for their revenues, underperformed the far more international FTSE 100. Likewise, the stocks that did best amid the widespread selloff were those with more international exposure, including pharmaceutical and tobacco companies.
A month after the vote, though, and both indices were back at early-June levels, and the FTSE 100 even managed to hit a new high in October. This was primarily due to continued depreciation in the value of the pound, but expect many other factors to come into play as Brexit draws closer.