Markets react to Brexit

At the beginning of the first full trading week since the announcement of the UK voting to exit the EU, financial markets have reacted sharply.

The FTSE 100, the index of the largest 100 companies on the London Stock Exchange, seen as an indicator of the performance and expected performance of those companies and the economy, was trading at near the 6,000 mark this afternoon, up slightly from it’s plunge on 24th June, but down overall by about 200 points from the beginning of the month.

House builders have seen their share price fall, indicating fewer new homes may be built in the future, adding to Britains housing crisis. Shares in the entertainment and leisure industry, such as Easyjet, were also hit, indicating there is an expectation consumers will have less spare cash in the future. More troubling for the Chancellor was the slump in banking share prices with a total of £6.5bn being lost from government stock in banks they bailed out. The Chancellor had been hoping to sell these off in order to pay down the national debt.


Sterling has also been hit, falling to about $1.30 to the pound, down from $1.45 at the beginning of the month. Sterling also fell against the Euro, down to €1.20 to the pound, from about €1.30 at the beginning of the month.

The weakened pound is bad news for travellers, with £1,000 last week buying you $1,501, but only $1,318 today.

Businesses needing to purchase foreign products for manufacturing will also suffer with these goods effectively costing more. Consumers could see price rises in non-UK goods, and particularly in energy bills, and consequently inflation.

However, the weaker pound also means UK exports will be cheaper, increasing export growth and potentially impacting positively on the manufacturing sector, negating these effects.

David Cameron has this afternoon reiterated Bank of England Governor Mark Carney’s statement, that the economy is well placed to weather the current storm with low inflation, high employment, and a strong banking sector.

Chancellor, George Osborne, who had been expected to resign, also spoke to offer reassurance that the UK economy was well placed to cope, saying it was still growing, banks were better financed than they were in 2008, so were more able to lend to businesses wishing to invest and, therefore, maintain growth momentum, and that the deficit was down to 3% of national income from 11%.

Political implications

With David Cameron’s resignation on Friday, and the current turmoil in the Labour party, many in the City feel there is no political leadership to calm the markets. This along with no exact date for when the UK will trigger article 50 and begin the exit process is creating further uncertainty with Guenther Oettinger, a German member of the EU’s executive European Commission telling Deutschlandfunk radio, “Every day of uncertainty prevents investors putting funds into Britain, and also other European markets. Cameron and his party will cause damage if they wait until October”

Economists have cut UK growth predictions, with Goldman Sachs expecting a mild recession, and in an increasingly globalised economy the impact is expected to hit far beyond Britain with China and Japan already expecting to feel the effects.

However, ex-Bank of England governor, Lord Mervyn King, told the BBC, “I don’t think people should be particularly worried, markets move up, markets move down.”

“We don’t yet know where they will find their level and the whole aspect of volatility is that there is a trial and error process going on before markets discover what the right level of stock markets and exchange rates actually are.”

“What we need is a bit of calm now, there’s no reason for any of us to panic.”

He went on to confirm George Osborne and Mark Carney’s statements that the UK economy was well placed to cope with the current market slumps.