“Brexit could mean fewer JPMorgan job in the UK and more jobs in Europe”
Jamie Dimon, CEO of JPMorgan
“We have 5,000 people in global banking and markets in London and I could imagine that around 20% of those would move to Paris”
Stuart Gulliver, CEO of HSBC
When HSBC decided against a move of its Headquarters to Hong Kong and chose to stay in London earlier this year, the believe that the UK would choose Remain in its EU referendum must be one of the reasons behind the bank’s decision. Indeed, this belief was shared among most market participants globally. They considered the long time stalemate between the Leave and Remain campaign a mere repeat of that during the Scotland’s independence referendum last year when the country voted against becoming an independent country by 55.3% to 44.7%. Far less deadlocked than the current 51.9% to 48.1% between the Leave and Remain. Last year, polls frequently showed that more Scots wanted independence than not, and a stalemate between the two groups was almost routine during the campaign. But when they finally went to the polling stations, many Scots changed their minds, and the result was apparent.
Psychologically, there is inertia in people’s minds that most of us would choose to keep the status quo rather than inaugurate a sweeping change to our lifestyles. This inertia was one of the reasons behind Scots’ decision, as well as what the market assumed and on which assets were priced.
Now the assumption backfired, along with a slumping sterling and skyrocketing prices of gold and haven currencies such as Japanese yen and US dollar. Bond prices, which have an inverse relation to bond yields, are also soaring in countries like Germany, Japan and the US, all of which are considered safe havens in times of instability. Emerging market currencies are also witnessing huge swings as US dollar strengthens. FTSE 100 is down 4.3 percent, while the Nasdaq across the Atlantic is down 4.1 percent. The Tokyo Price Index (Topix) plunges even greater with some 7.3%, and UK-exposed listings on the Hong Kong Stock Exchange such as HSBC also suffered.
These are the immediate ramifications of Brexit. Instability and volatility are and will be the main elements in the market. As the initial astonish and panic wave in the medium term when more information will be coming through, investors will ultimately factor in these once unlikely elements and events and push asset prices back to normal levels. But more intricate and profound disputes will take place in the field of real economy and politics and keep creating predicaments for the region and the world in the mid-and-long term.
On top of the list are central banks’ future policies. Japan postponed its sales tax hike and is dedicated to bolstering its stagnant economy by keeping its policy target of a depreciating yen. However, the effect and limit of both Japan’s monetary and fiscal policies are open to debate given new uncertainties in the post-Brexit market. Government interventions may not achieve desirable results if investors’ risk aversion prolongs and international hot money swarms into the haven yen and government bonds.
ECB faces a similar but knottier challenge. Current and future implications of any further asset purchasing programs may well boost the region’s economy and prevent the market from panic sell-off as investors are desperately looking for something to compensate the loss incurred by Brexit, given the importance and abundance of UK-EU trading, among others.
Life will be easier if this is the only task that the ECB has to deal with. Questions remain as how low the interest rate can go given the already negative number, and how long such atypical policies can persist before another Leave referendum is called upon in another member state, particularly countries who do not use the single market currency. When further easing may trigger a new wave of Eurosceptic and far-right movements, and regional economy policy has to go head to head with local politics, officials in Frankfurt may need to think twice before another purchase.
Political uncertainties in the region may dampen the recovery of markets, as well as the real economy. The Transatlantic Trade and Investment Partnership (TTIP) is a planned trade agreement between the United States and the European Union. An economic council was set up in 2007 to guide the process and on 14 June 2013, Member States gave the European Commission the green light to commence negotiating with the US. All took place when the UK was a member of the Union. During the year of 2014, EU was the largest trade partners of the United States, representing 17.5% of the US’ total trade, eclipsing those of Canada and China. 15.6% of these total trading with EU came from the UK, only lagging behind Germany’s 24.9% within the Union. The US is also EU’s largest trading partner by total trade.
Things get tricky now after Brexit. The UK and EU have to negotiate with the US separately if the UK wants to take part in such a trading agreement at all. And do not forget that the UK has to settle and re-establish new trading rules with Brussels as well. The imaginable bureaucracy and time involved in these processes will only dull the already volatile market and contracting global economy.
In the immediate aftermath of Brexit, the world did not give any positive response to the decision made by the British. Rumour has it that more than 60,000 Londoners are now petitioning for the city’s independence and remaining in the Union. This is understandable as uneasiness of London’s position as a stepping stone into Europe due to the Union’s so-called “passporting” system is escalating because of potential barriers, and possible deteriorating financial and economic relationships with the Union are cannibalising the market’s confidence in the capital.
Premier League fans around the world will also be disappointing. The League has strict regulations regarding the number of non-UK players in each team, particularly those coming from non-EU countries. Many EU players who previously qualified for special treatments of their visa status because of UK’s EU membership may now find their new identities as non-UK players troublesome. Many of them may choose to leave the Premium League and go to La Liga and Bundesliga instead.
Leicester City, the creator of last season’s fairy tale, is consisted of many EU players. From the Danish goalkeeper, Kasper Schmeichel to the rising star, French midfielder Ngolo Kante, EU players is an indispensable part of the club’s success and global charm. A vote to leave may create unprecedented barriers for their continuous contribution to the League.