Brexit impact: Pound, rupee sink; gold up, stocks tumble, Cameron quits

Black Friday sees stock markets tumble and currencies in a freefall as Brits vote to leave the EU

'Brits don't quit' was British Prime Minister David Cameron's final appeal to his countrymen before they began voting in the historic EU referendum yesterday.

They didn't pay heed. Britons have voted to leave the European Union, and Cameron announced his resignation as PM after an emotional speech this morning.

In a historic referendum, a vote by Britain to leave the 28-member EU - dubbed ‘Brexit’ - trumped ‘Bremain’, the voting for a status quo.

Brits quit

As of 9.30am UAE time, the ‘Brexit’ camp had won by a narrow but decisive margin of close to a million votes, with the 48.2 per cent votes cast for the ‘Bremain’ camp and 51.8 per cent in the favour of leaving.

Almost 17 million Brits voted for their country to exit the EU while less than 16m voted for it to stay rooted in the camp.

Pound, rupee sink

In an immediate aftermath of the stats, the British pound sank against the US dollar (and dollar-pegged currencies such as the UAE dirham), at one stage hitting $1.3305, a 10 per cent plunge, and a low not seen since 1985.

As of 9am UAE time today, £1 will fetch just Dh4.9, compared with Dh5.43 that it fetched at the same time yesterday.

Emerging market currencies such as the Indian rupee bore the brunt too, with foreign investors pulling out in droves out of the so-called risky asset classes. The rupee, which was yesterday trading at 18.30 against Dh1 is now below 18.50 to Dh1, a decline of more than 1 per cent. 

As we said yesterday, Brexit “will have a damning impact on the value of the pound sterling vis-à-vis the US dollar and the UAE dirham. That will not only impact British expats here, but also will affect the price of goods imported from England – cars like Jaguar, Mini, Aston Martin, Rolls Royce, Land Rover and Bentley will get affected.”

Earlier in the week, Billionaire investor George Soros had warned that a ‘Brexit’ vote could trigger a worse fall for the pound sterling than ‘black Wednesday’ – the day he forced Britain out of the Exchange Rate Mechanism almost a quarter of a century ago.

Gold surges

The markets got it wrong (again), with Pound Sterling actually surging by about 5 per cent in the week until yesterday, and gold near a two-week low. 

Gold is up $64 an ounce this morning, or more than 5 per cent, at $1,325/oz as investors who got it wrong were sent scurrying to safety of the bullion.

Oil slips

Global oil prices slipped by about 5 per cent as news of a 'Brexit' vote gained momentum. As of 10.20am UAE time, Brent crude was down 4.97 per cent at $48.38 per barrel while US West Texas Intermediate (WTI) was down 5.03 per cent at $47.59 a barrel.

UAE imports from UK to get cheaper?

Besides cars, the UAE also imports from the UK a host of goods in other sectors, such as telecommunications, power generating machinery and equipment, electrical goods, transport, office machinery, interior and retail goods and non-metallic mineral manufacture. All these will be potentially impacted as the value of Pound Sterling fluctuates., on the Brexit announcement and it's impact on the market.

"Impact [of Brexit] on the GCC, if any, will be very short-term, particularly the financial markets and currencies. But in the mid- and long-term, it would have no impact on the GCC markets including UAE," reckons Shailesh Dash, CEO & Board Member, Al Masah Capital.

"I think this is a historic moment and it's impact on the future of Europe and the rest of the World will be of enormous importance. I am sure the economic impact will be mixed in the short-term, more negative than positive, and one has to see how the phenomena of single markets and collaborations and trading blocs pans out from here onwards.‎ This has significant importance to European Union as a single trade bloc and other economic matters," he added.

Stock markets panic

Stock market investors are panicking too, reacting by pulling out of global markets overnight as the results became clear.

As of 11.15am UAE time, the FTSE 250 index had plunged 11.7 per cent. 

Bombay Stock Exchange Sensitivity Index (Sensex) plunged by 1,000 points within minutes of opening on 'Black Friday' as investors lost faith in risk assets. At 10am UAE time, the Sensex slipped below 26,000 points for the first time in more than a month. 

In other Asian markets, Japan's Nikkei sank 7.6 per cent while Hong Kong's Hang Seng dropped 4.7 per cent. 

Share prices of British banks traded in Hong Kong were hit especially hard, with HSBC falling more than 11 per cent and Standard Chartered plunging over 12 per cent.

What to expect

It’s a cliché, but expect the unexpected. The calls for the ouster of British Prime Minister David Cameron (who was in the ‘Bremain’ camp) will get louder now. He will be speaking to the people at 10am UAE time.

The ‘out’ vote will also be negative for about 3 million EU citizens currently in Britain, and about 1.2 million Brits living in other EU nations. At least some of the foreign workers who needed minimal paperwork until now may lose their right to live and work in England. 

While the Brits have voted, ramifications of the decision will take years – even decades – to unfurl. Soon, England will have to start trade negotiations with the EU, a process that could take years to be finalised. Simultaneously, there will be political and business negotiations with what will be a 27-nation bloc.

Investors now believe there is an even less chance of another hike in US interest rates given the Federal Reserve had cited a British exit from the EU as one reason to be cautious on tightening. That means interest rates may remain lower for longer, even in the UAE, which follows a dollar-linked currency policy. 

Business at a crossroads

Businesses across the UK and Europe now face a race against time to prepare for Brexit, according to advisers at London headquartered international law firm Pinsent Masons.

"The uncertainties in a Brexit scenario are so great that there may be a temptation to do nothing until negotiations start to create a clearer picture. However, the days when a business can say ‘wait and see’ are gone. While one cannot protect against all risks, it is important that there is no panic – it is possible to identify the risk areas and get on to the front foot.  Adopting a ‘wait and see’ approach may mean doing nothing for years," said Guy Lougher, a London-based Partner and Head of the Brexit Advisory Team convened at Pinsent Masons.

“Due the far-reaching impact of this vote, Brexit will inevitably affect the British and the European economies and the wider global financial markets.  The decision may have been taken in the UK but it will impact the rest of the world too," added Nigel Green, founder and CEO of deVere Group, a financial advisory firm.

“Investors around the world on Friday will pile into safety and prompt a significant shift in global markets from risky assets to safe havens. The world’s currencies, equities and bonds are now on magical mystery tour - at least in the short-term," he said.

A looming 'DIY recession'

Richard Buxton, head of UK equities and CEO, Old Mutual Global Investors, calls it the world’s first 'DIY recession'.

“The UK has voted to leave the European Union. As the initial reaction in financial markets has shown, there is no merit in pretending that for investors and companies this is not, by some margin, the worst of the two possible outcomes of the referendum,” he said.

“The biggest sadness of today is that it is reasonable to assume that the UK will quickly enter a period of economic recession, the key reason why we believed the outcome would be different from what has materialised today. It is, in effect, likely to be the first ever 'DIY recession', as George Osborne prophetically called it,” he added.

The 'leave' vote in the EU referendum could see a drop in GDP of up to 4 per cent and years of economic uncertainty, according to London Business School economists.

Richard Portes, Professor of Economics, London Business School, argues that as well as a fall in output and employment, major financial disturbances are likely.
 
“The economy’s current account deficit is now 6-7 per cent, financed by capital inflows likely to dry up or reverse. Short run risks include a real estate crash, at least in London, and an exchange rate crash,” says Professor Portes.

“More than 50 per cent of UK exports go to the EU. The fall in trade will hit exports and the dynamism of the economy,” he said.

 

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