What is the 'Brexit Vote'?
The United Kingdom (U.K.), comprised of England, Scotland, Northern Ireland, and Wales, has been a member of the 28-nation European Union (EU) since 1975. The EU members are allowed to freely move goods, capital, services, and people among the member nations. However, they do not all share a single currency. (Countries within the EU that share a single currency—the euro—are referred to collectively as the Eurozone.) The Brexit vote was a referendum (held on June 23) on whether the U.K. would remain part of the EU or leave, and the vote was to leave. British Prime Minister David Cameron, a strong proponent of remaining in the EU, immediately resigned.
What are the next steps?
The U.K. and EU will work over about the next two years to determine the terms of the U.K.’s economic separation from the EU. Therefore, nothing happens immediately—the U.K. has just made clear that it will separate. Until then, existing trade and immigration agreements will remain in place. However, many businesses are likely to start taking actions, such as finding new suppliers, reducing staff in the U.K., cutting costs, delaying investment due to uncertainty, or making plans to move headquarters out of the U.K. We expect central banks to intervene to help stabilize markets in the coming days. Additionally, with the resignation of the Prime Minister, the U.K.’s government will need to be reconstructed before these separation conversations happen in earnest.
Why is there so much market volatility?
Although the pre-referendum polls showed a very tight race, in the days leading up to the vote, financial markets (equities, fixed income, commodities, and currencies) had begun to expect that the U.K. would vote to remain in the EU, driving equity and commodity prices and bond yields higher. Even in the last few hours of the vote, markets were convinced that the U.K. would vote to remain. When the vote went the other way, markets responded, leaving most markets back where they were in mid-June, although some (like the British pound, European stocks, and global banks) have fallen much further during overnight trading.