Not that long ago, 10 days as of this writing, the UK held a referendum as to leave the EU or remain in the EU.
We all went out to vote on this, and it was a close vote with the leave side winning.
There were immediate implications from this vote, the first was the stepping down of the Prime Minister. Mr. Cameron stated he felt he cannot fully lead the country as he was in the remain camp. He has stated he hopes a new Prime Minister can be in office very soon.
Financially there were implications from this vote as well. The Pound had been losing value against the US Dollar prior to the vote, however the day before the vote the Pound gained and was near $1.50 to £1. After the vote the Pound slipped to its lowest point in 30 years to around $1.30 to a Pound.
The stock markets dropped as well, in addition to the UK’s credit rating being lowered to “negative”.
As the government has not fully addressed how we will exit the UK, and have yet to elect a new Prime Minister, the uncertainty of matters still weighs on the minds of investors, home buyers, and in some way, it weighs on all of us.
Within hours of the outcome of the leave vote being made public and officially being announced, Mark Carney the Governor of the Bank of England made a statement that the Bank of England would provide £250 billion of “additional funds through its normal facilities.”
The reason for this is to instil confidence in the economy and markets.
In a press release the BOE stated:
“Some market and economic volatility can be expected as this process unfolds.
But we are well prepared for this. The Treasury and the Bank of England have engaged in extensive contingency planning and the Chancellor and I have been in close contact, including through the night and this morning.
The Bank will not hesitate to take additional measures as required as those markets adjust and the UK economy moves forward.
These adjustments will be supported by a resilient UK financial system – one that the Bank of England has consistently strengthened over the last seven years.
The capital requirements of our largest banks are now ten times higher than before the crisis.
The Bank of England has stress tested them against scenarios more severe than the country currently faces.
As a result of these actions, UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets.”
As a result of this measure, the markets did eventually settle down. Unfortunately we are still in a volatile and uncertain time. This is the main reason our credit rating was lowered.
There is no formal plan to leave the EU, Article 50 (which is the actual start of the leaving process) has yet to be invoked, and the government itself is struggling to determine a leader.
The Labour party has no confidence in their current leader, and Boris Johnson who was expected to be in the running as new Prime Minister, and who was such a staunch advocate for leaving the EU, decided not to run for the job of PM.
As we look at various areas of our economy, we will see how and why these factors have influenced where we are today.
For the everyday person who works, gets paid, and has the usual monthly bills, we are not going to see much changes within our relationship with our bank.
It is the banks themselves that were losing, and lost money as their shares dropped.
Barclays alone saw 32% of their worth disappear. Trading had to be suspended for a period to slow the losses down.
Unfortunately as tax payers and having a government stake in RBS and Lloyds, some of our money was lost. £6.5 billion in RBS, and £1.4 billion in Lloyds. This is almost equal to the UK’s contribution to the EU in 2015!
As the market starts to return to normal, there may be some gain in offsetting some of these losses.
As to how the banks will respond to the losses?
The Bank of England as mentioned before, is making billions available to keep the economy going strong. They may lower interest rates, or the banks may do some internal adjustments as well.
Many people are having concerns that they may lose their jobs due to the Brexit, and some of those concerns are valid.
There are two forces at play here:
* Companies that rely heavily on EU trade, may see an increase in the cost of doing business, which could cause losses, or a work force reduction.
* Some companies have mentioned they are considering moving their head offices to outside the UK. This could cause job losses a well.
EasyJet is one such company that is considering moving the headquarters outside the UK.
After the vote the company made a statement:
“EasyJet has been preparing for this eventuality in the lead up to the referendum vote and has been working on a number of options that will allow it to continue flying in all of its markets.”
Carolyn McCall EasyJet’s Chief Executive added she had, “written to the UK Government and the European Commission to ask them to prioritise the UK remaining part of the single EU aviation market”.
Again, a lot of uncertainty here, and in time we will know more.
Investors flocked to the banks to get loans prior to this new law coming into effect in April. This caused a spike in the number of loans usually granted. Then naturally after the duty increase, loan numbers went down.
People purchasing houses seemed to slow just prior to the vote, again due to uncertainty, and as the closer the voting day came, the more the odds changed. Initially it looked as though we would remain in the EU, as the vote got nearer to looking it was close race, it scared some buyers.
Now we have seen the vote to leave win, it has sparked some changes in housing prices, but as we have seen with other aspects of the economy, there have been some “knee-jerk” reactions.
Some feel after an adjustment period, we may benefit from not being bound by EU laws and rules, and it could help the property market.
The CEO of Winkworth, Dominic Agace said, “We saw this last year with the General Election, with a quieter period in terms of transactions in the lead up to the vote, and so we anticipate a similar effect in the lead up to Referendum. However, the UK and London in particular has always had a draw for foreign investment, not only from Europe but much further afield, and I would expect this to continue whatever the outcome, especially as people come for many reasons including schools and the lifestyle.”
The Head of Winkworth’s International Department, David King said, “There may be implications for UK buyers looking in mainland Europe should we exit the EU.”
He adds, “If, following an exit, extra rules were introduced for British buyers such as visa or money checks then the process could be more difficult. However, as with the UK, investment by overseas buyers is more often than not welcome and as such I cannot foresee any stipulations being too problematic. Instead it is likely that those looking to buy will just need to make sure they can confidently negotiate the process, which a good estate agent and lawyer with experience in these markets will be able to assist with.”
One Singapore bank is to stop lending mortgage loans in London after the leave vote.
United Overseas Bank is the third-largest lender of mortgages to those wishing to buy property in London, and there are many people from Singapore who have been buying properties in London.
The bank in an email said, “We will temporarily stop receiving foreign property loan applications for London properties”
“As the aftermath of the UK referendum is still unfolding and given the uncertainties, we need to ensure our customers are cautious with their London property investments.”
“We are monitoring the market environment closely and will assess regularly to determine when we will re-instate our London property loan offering.”
As to if other banks will follow, a partner at law firm Collyer Bristow, Alex O’Connor said, “We’re certainly not seeing Asian banks or investors pulling back from UK property investments – if anything, there’s a rush by investors to get deals done.”
“Dollar-denominated investors from Singapore, Hong Kong, the Middle East and elsewhere in Asia are keen to lock in favourable sterling exchange rates, and that’s resulted in a strong push for negotiations over contracts to be moved forward as much as possible.”
Currency Exchange Rates
As previously mentioned, the Pound fell to a 30 year low against the US Dollar after the vote to leave was announced.
While the exchange rate has rebounded slightly, it is still no where near where it was. As of this writing it was about $1.32 to £1.
Mark Carney the Governor of the BOE recently stated, “In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.”
There is some speculation that the BOE may lower interest rates, but nothing has been formally stated.
Mr. Carney added, “I can assure you that in the coming months the Bank can be expected to take whatever action is needed to support growth subject to inflation being projected to return to the target over an appropriate horizon, and inflation expectations remaining well anchored.”
Investors are stating the odds are that interest rates will be reduced.
One area that has been massively affected by the exit vote are the stock markets. Share prices dropped immediately after the announcement of the vote to leave when the markets opened.
And it is not just the stock exchange in London that was affected, it was markets across the world.
The following Monday after the vote, I was speaking to someone in the United States. They informed me their pension had lost £15,000 on the day the vote was announced.
So our actions here do have a huge ripple effect across the globe.
Some banks here in the UK lost billions of Pounds, and since the losses came so quickly, emergency circuit breakers that track trading suspended trading for a short period of time.
The panic due to the exit vote cost the world $2 trillion!!
That is a lot of losses.
Here in Britain we lost £125 billion just ourselves.
Fortunately the markets have been rebounding, not to the extent as to where they were, but they are climbing back. This is something that is going to take time.
An Analyst at IG, Joshua Mahony stated, “There is a confidence within the City that perhaps the implications to this vote may not be as immediate nor far reaching as many initially thought, providing opportunities for bargain hunters to grab shares at a discount.”
In commenting on the “rally” that attributed to the rebounds he said, “usual combination of short-covering and bargain hunting”.
Share prices were low, so people wanted to buy them at the reduced price.
I would expect once the formal plan to exit the EU is in announced and in place, it may cause some additional blips in the markets. But hopefully once the plan is announced the market would stabilise.
As you can see, and have been living the past 10 days, the vote to leave the EU is massive, and the implications it has and will continue to have on our economy and our island as a whole, will continue for quite some time.
,Not that long ago, 10 days as of this writing, the UK held a referendum as to leave the EU or remain in the EU. We all went out to vote on this, and it was a close vote with the leave side winning.