Within minutes, global markets lost $2 trillion.
Indexes buckled under the strain of Britain’s vote to leave the European Union (EU).
The pound tumbled to its lowest point in 30 years. The Dow Jones Industrial Average plummeted 600 points. The FTSE 100 Index fell to a 2008 low.
Gold surged to $1,358 an ounce. Banking stocks collapsed. Barclays fell as much as 30%. Deutsche Bank was down nearly 18%.
Prime Minister David Cameron even announced his resignation.
Traders are in a state of panic, and talking heads are struggling to make sense of what’s next.
It’s a slow-motion disaster in the making, shocking many market participants who bet England would vote to remain in the EU. All as the UK voted 52% to 48% to leave the EU, in a vote that revealed very deep divisions among political parties.
The future of the region now depends on three key things, as pointed out by The Wall Street Journal.
One, will uncertainty of what happens next damage investments in the UK?
Two, will the UK now struggle to maintain the same level of access to other markets for trade and investment?
And three, will the results of the referendum set off a firestorm of political and economic fragmentation across Europe?
A lack of answers to those questions is inducing a great deal of concern and volatility, reverberating throughout global markets. Now, there’s fear France, Italy, and The Netherlands could leave the Union as well.
So what happens next?
As the panic dies down, calm will eventually prevail, and markets will prove themselves to be as resilient as with past crises. For the British pound to continue to trade this low is not sustainable.
We have to remember that the exit will take at least two years of talks to finalize agreements under Article 50 of the European Union treaty, which formally notifies the intension to withdraw. Once that is put into place, any treaties that govern EU membership no longer apply to England.
Issues to be agreed upon will include what financial regulations will apply to the City of London, trade tariffs, and rights of EU and UK nationals. The agreement must then be ratified by the European Union.
If no deal is agreed upon, rules of the World Trade Organization could apply. That would mean the UK would have to pay new import tariffs and face non-tariff barriers, much like China and the U.S. trade with the EU, according to the BBC. UK services – which account for up to 80% of the UK economy – would “lose their preferential access to the EU single market.”
Free trade deals that have been negotiated with the EU would also no longer apply to the UK. If the UK wanted those benefits, it would have to negotiate those on its own.
Again, this could happen if the UK and EU fail to come to an agreement. But it will take up to two years for anything to happen. There’s no need for the panic we’re seeing.
Sure, no one knows what will come next.
The world map is being redrawn with regards to rules of commerce throughout Europe.
And, the exit vote has now set in motion an unpredictable process that threatens to induce great volatility, uncertainty, and crisis for the global community.
However, we must remain calm in times of chaos.
The U.S. Federal Reserve has also noted it’s ready to provide dollar liquidity “through its existing swap lines with central banks, as necessary to address pressures in global funding markets, which could have adverse implications for the U.S. economy.”
You may hear the words “panic” and “bloodbath” a lot over the next few days and weeks. Analysts will foolishly advise you to increase your cash positions. However, since nothing will change right away, The Cheap Investor can use the current market overreaction to find attractive buying opportunities that will make profits for our subscribers.