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The Future of Brexit

Equity markets have cooled since the surprise Brexit decision was announced to the world. Ten trading days after the decision, the S&P 500 regained what it had lost in the selloff. Eleven trading days after Brexit, the S&P reached an all time high. The record came on the back of an outstanding jobs number along with easing concerns surrounding Brexit. It seems extraordinary that we can have market chaos one day and reach a new all time high in the following weeks. It is clear that the instability of the EU was weighing heavily on the market, but have we forgotten about it too soon?

There are still many major elements of Brexit that have yet to be decided, especially the trade agreements. Realistically, the trade negotiations will have only three outcomes, resulting in two market reactions.

Better or the Same

Jump to the point in time when Britain’s trade agreements are all re-negotiated. Britain comes out with great new open trade deals with no penalties for leaving the EU. The markets are extremely pleased that the fifth largest economy in the world will continue to openly trade with the EU market place. The not so obvious consequence of this is that other nations within the EU who may have been leaning towards an ‘in-out referendum’ now have the trade precedent set. With no sanctions for leaving, what is to stop those nations from at least posing the question to their people. The result is an increasingly divided EU and an increasingly unstable market. A jump in the market due to favorable trade agreements may present a good time to take some money off the table, as an unwind of the EU could be a long and very rocky road.

Worse

Imposing trade sanctions on Britain is certainly an effective measure to dissuade other members of the EU from trying the same thing, but it will also rekindle the fear the market felt when they first heard of the vote. The forecasts of drastically reduced GDP over the long term combined with decreasing real estate prices will once again be fresh in the minds of investors. The negative reaction that we so easily forgot about will once again show itself. Just as the pullback from Brexit rebounded because it was used as a buying opportunity, a pullback on the news of trade sanctions would also be a buying opportunity. On the face of it, sanctions against Britain elicit a negative market reaction, but sanctions also incentivize maintaining a stable EU and a stable EU can help make a stable market.  

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