After a weekend of reading about Britain’s exit from the European Union (“Brexit”), I'm still befuddled by this unexpected and unwelcome event. Its immediate impact on the financial markets has been enormously painful. Global equity markets lost about USD2 trillion in value on Friday. We can expect volatility to remain for the next few weeks as the financial markets sort out the full implications of this development.
Brexit plunged the UK into a crisis as the Prime Minister Cameron has resigned to take responsibility for the loss. A caretaker government may step in until a successor has been elected in October. Cameron has wisely decided not to invoke Article 50 of the Lisbon Treaty to begin the withdrawal from the European Union (“EU”). This may buy time for the people to decide on the whats, hows and whens the next steps will be.
For now, there is still much confusion on the outcome of Brexit as well as a fair amount of buyer’s remorse. Among the “Leave” campaigners, they were many who simply didn’t believe the vote will be successful. Their fear was a poor showing which might weaken British’s position in any future negotiation with Brussels. Over the weekend, a petition for a re-vote attracted more than 3 million signatures. Interestingly, the petition was started by a “Leave” supporter.
How the political elites in London, Brussels, Berlin & Paris handle the Brexit outcome will be critical, not only for the future of UK’s position within the European Union but also the future of the EU as well as the UK. For the UK, an exit from the EU could lead to a breakup of UK. The Scots, which had voted in 2014 to remain in the UK, had voted this round overwhelmingly in favor of remaining in the EU. They are now clamoring for exit from the UK. For the EU, Brexit could lead to other nations withdrawing from the EU. There is much interest in not having Brexit or, if Brexit is inevitable, to make the exit a swift but painful affair.
Meanwhile HMS London is rudderless. The Conservatives will likely elect a new leader to spearhead Brexit in October. After all, Brexit referendum was Cameron's tactic of appeasing a faction in his party that wants the UK to exit the EU. Any deal negotiated by the new leader with Brussels is likely to be put before the people. Thus, the UK will probably have a second referendum in the form of a General Election where the Conservatives would argue for the people’s ratification of the Brexit deal while Labour party will argue against it. That General Election will decide the final exit from the EU. And, it's because of this likely General Election in a not-so-distant future that Labour party leader, Jeremy Corbyn is now experiencing a challenge within his party. Many of his party leaders want a more dynamic leader to lead them into the next General Election.
Equity markets will remain volatile in the short-term because there will be plenty of talks about Brexit. After a while, the market will get bored because there will be no action taken to begin the process for the Brexit. Then the selling will subside and the recovery can begin.
Our FBMKLCI is currently in a downward channel. The immediate support will be at the horizontal lines at 1620 & 1600. If these lines are violated, the index may revisit its August 2015 low at 1500.
Chart: FBMKLCI's weekly chart as at June 24, 2016 (Source: ShareInvestor.com)
I will leave you with this thought of a strange world that we are living in today.
Suppose They Voted For Exit and Nobody Left