FTSE 100 down 8% this morning. Why?
Because investors think it’s a bad idea?
More specifically because of uncertainty, no one knows the terms on which the UK will leave the EU, or if it will leave at all (the referendum is not legally binding on parliament). Markets hate uncertainty, so they’re punishing the UK, its a less attractive place to invest than it was yesterday and than it would have been if it voted remain.
The standard view of Brexit is that Britain will be slightly poorer as the result. (Some people don’t believe this, many people don’t think it’s as important as other considerations)
In particular, big companies, the kind foreign investors invest in, are expected to be worse off. This means that, medium forcast, people want to sell big British stocks, and invest their money somewhere else.
But sharp movements like this are the result of speculation – there is always speculative money washing around.
The change in the GBP indicates that those speculating on the UK staying in put in more money than those who speculated on it coming out. When the result was known, all bets were paid.
It’s not just down to the speculators being wrong, the vote to leave is fundamentally riskier and is going to cause an extended period of uncertainty for businesses in the UK. People are selling off pounds and shares in UK companies and putting their investments in a safer place until the uncertainty is resolved, which is going to take more than two years.
The result is a surprise, the last polls indicated that remain would win, thats why the sudden 13% drop, otherwise the pound would have declined more gradually over the last four months if leave was always expected to win.
The markets bet on Remain winning, now they are scrambling to cover their position.
There are a lot of companies that are nominally US, but are legally headquarteredin Great Britain for tax purposes and for trade zone access to the European Union. While Great Britain trade agreements will remain, at least for the short term, they’ll have to be renegotiated, and big companies hate uncertainty.
Well, but note that the flight to safety has been into UK government bonds, whose yields are hitting new lows.
It was widely believed right up to vote counting time that Remain was going to win, and investors harboured the same assumption, so the pound was already discounted to a level at which it would be supported with a win for Remain. When things suddenly turned around, many investors felt pressure to flee in a panic mode. When this happens, there is a run to a safe haven, such as gold.
Most political events which are anticipated do not make a ripple in the market, because they have already been gradually moved to a level reflecting the expected results. Upheavals happen only when one result is already discounted, but events bring about a different result.
Consider someone like a car manufacturer. With EU membership, I assume they could sell their cars all over Europe, no import duties. With UK out - why would EU, with car makers all over, want to allow an outside manufacturer to sell into the EU duty-free? Ditto for every other industrial or agricultural product. As one pundit said, why would the EU give UK a good deal; it would only encourage the separatist movements in other countries.
Even worse, inside the EU goods move from one country to the other virtually unhindered. Contrast this with the delay and paperwork when goods cross borders even between the USA and Canada - mountains of paperwork, issues about labelling and meeting health and safety standards, taxes, inspections, and such - now imagine that suddenly the UK will be faced with the same sort of hindrance to open trade with the rest of Europe. (And again, Europe has no incentive to make things easy)
Business is going to be worse and things will be worse for the average UK citizen - more expensive, more difficult.
Not sure how it would affect things like the financial markets in London, but I imagine there could be tax implications in investing outside the EU… so some of the money stops flowing.
All in all, more downside than upside.
Not when compared to German bonds, whose yields are negative. People are paying the German government to make sure they won’t lose too much of their money in the future.
From United Kingdom Rates & Bonds - Bloomberg
Name Coupon Price Yield 1 Day 1 Month 1 Year Time (EDT)
GTGBP2Y:GOV
UK Gilt 2 Year Yield
1.25 102.04 0.25% -26 -20 -37 12:00 PM
GTGBP5Y:GOV
UK Gilt 5 Year Yield
1.50 104.22 0.56% -33 -36 -101 12:00 PM
GTGBP10Y:GOV
UK Gilt 10 Year Yield
2.00 108.00 1.08% -29 -39 -105 12:00 PM
GTGBP30Y:GOV
UK Gilt 30 Year Yield
3.50 134.43 1.92% -26 -39 -90 12:00 PM
http://www.bloomberg.com/markets/rates-bonds/government-bonds/germany
Bund Yields
Name Coupon Price Yield 1 Day 1 Month 1 Year Time (EDT)
GTDEM2Y:GOV
Germany Bund 2 Year Yield
0.00 101.29 -0.66% -9 -14 -45 11:59 AM
GTDEM5Y:GOV
Germany Bund 5 Year Yield
0.00 102.59 -0.54% -10 -19 -68 11:59 AM
GTDEM10Y:GOV
Germany Bund 10 Year Yield
0.50 105.30 -0.05% -14 -25 -92 11:59 AM
GTDEM30Y:GOV
Germany Bund 30 Year Yield
2.50 156.13 0.49% -24 -42 -112 11:59 AM
So why is the USD down against the GBP?
GBP/USD has lost about 8.5% over the past 19 hours. Thursday the Pound hit a high of $1.50. It fell to $1.32 and is about $1.37 as I type.
Heh. Good point.
The pound is way down against the dollar. It is likely to bounce back a bit as American investment money flows into the UK to buy underpriced assets, but I’d be surprised if it regained all of its ground.
Money managers (especially the people who control hundreds of millions/billions of (insert national currency here) are seeking safety for their assets. Unless there is a investment that pays a good rate of return, or an investment that pays a meager rate of return, sometimes the best investment is one that doesn’t lose money.
Sell volatile assets. Invest in gold, silver, or government bonds. Wait for the markets to settle down. See which direction(s) the markets are headed. Sell your uber safe assets and buy high interest paying assets.
As a former Premier of Saskachewan said: “There is nothing in the world as nervous as a million dollars.”
Investors hate uncertainty and there is now going to be at least two years of uncertainty over the British economy. Time to move money away from the British economy.
There is a good parallel to the way the Canadian financial sector responded to the election of the Parti Québécois in 1975 on a platform of separation from Canada. Up to that point, Montreal had been Canada’s financial centre, although Toronto had been making gains.
Once the PQ was elected, financial businesses started leaving Montreal. Sun Life led the way, relocating to Toronto, expressly because of the years of uncertainty that they saw looming in Quebec. Even if Quebec were to break up the country, they were betting on the larger, rest of Canada.
Montreal has never recovered its place as the financial centre. It’s Toronto all the way.
To be fair, in the case of Britain/Rest of Europe, it would be less clear which side to bet on. Likely both will have significant financial centres.
Sure, but the OP was asking about the pound, which showed an immediate effect.
For what it’s worth, the euro took a big hit against the dollar as well.
Because stock values, values of currencies, commodities, etc. have more to do with PEOPLE and PSYCHOLOGY than with reality.
You will find U.S. companies which have NOTHING to do with any of this, yet their stock went down yesterday. A company may make pretzels in Wisconsin, yet their stock will go up/down because of things totally unrelated to their business.
Some investors will “game” or “manipulate” stocks as well. So a particular stock can go up/down for no logical reason whatsoever. Some selfish people will “short sell” a stock and cause the price to drop drastically - then buy it back at a lower price. Also there is high frequency computer trading which no human can possibly match in quickness.
Basically stock values have NOTHING to do with reality, thus why it is more like a Las Vegas crap shoot!
I prefer investment grade bonds myself.