There has been a top-down torrent of negative predictions for the consequences of Britain’s decision two weeks ago to vote to leave the European Union.
Before the June 23 referendum, and plenty more afterwards, investors have been subjected to a long list of “we told you sos” from leading politicians and central bankers.
But while there is no getting away from the uncertainty and political vacuum the “Brexit” camp has created – as the status quo had been so widely tipped to win – history will likely judge the present market fallout as a necessary and painful transitionary period to shake out past assumptions and usher in a new order.
The movements have been pretty much textbook. At first the most UK-focused stocks, namely those smaller than the blue-chip FTSE100 constituents, took a drubbing. Then the blue-chips joined in for a while. Sterling has taken a bath at 31-year lows against the US dollar, and investors have taken a flight to quality in the safer haven of government debt. Even the oil price has been hurt from a relatively stronger dollar it seems.
Had opinion polls registered, or at least emphasised that at least 6% of voters were still undecided on polling day, and that this might just translate into a Leave EU victory, then markets would have had more time to adjust to what came on the morning of June 24.
So what does Brexit really mean for businesses both sides of the Pond?
Sterling is in the eye of the storm, and is likely to remain the barometer of confidence in the new UK government that takes over after a leader is selected by the governing party in September.
By then, it is forecast, the Brexit camp will have had time to think about what it wants from a new relationship with the EU but not in the EU. At that point, or soon after September, it is likely that the new Prime Minister will trigger the start of two-year negotiations to bring about the UK’s exit from the EU, the so-called invoking of Article 50 of the Lisbon Treaty.
At risk will be the ambitions of US companies hoping for more trade in the UK, especially the healthcare sector. Part of the Leave campaigns push was to highlight Transatlantic Trade and Investment Partnership (TTIP). A planned trade agreement between the US and EU, which now just might exclude the UK and therefore the valuable National Health Service marketplace.
But if the EU thought that all it needed to do was sit with the UK and negotiate the Brexit, that would be too simplistic.
Brussels is poised to host another round of negotiations on TTIP, a controversial trade deal proposing the creation of a comprehensive free trade zone between Europe and the US. But according to some analysts, with President Barack Obama preparing to leave office in January, time for negotiations is running out.
As potential protectionist shutters await both the UK and EU, so too they might in the United States, depending upon the outcome of the November White House elections.
The next round of negotiations over the trade pact is set to begin next week in Brussels. But the French government insists that there is virtually no chance for the agreement to be reached before the end of the Obama presidency. On Tuesday, French Trade Minister Matthias Fekl suggested that it was simply "impossible."
There are wider implications too. The minister also warned that that the Comprehensive Economic Trade Agreement, or CETA, which stipulates a free trade pact between Canada and the European Union, was also unlikely to be ratified this year, "because there is a lack of trust in internationalization, and a lack of delegation in the management of European security."
Analysts believe that the United Kingdom's vote to leave the EU has significantly complicated TTIP negotiations.
It looks like for US companies and possibly Canadian ones too, the outcome of Brexit and the delays to TTIP and CETA might well result in a poor outlook for trade eastwards for at least two years, and most likely five.
But is Brexit all gloom, like those politicians and central bankers have lectured the UK’s voters?
Well, while some of the prognosis, as Mark Carney the Bank of England governor said on Tuesday, “is crystallising” there are also reasons to hold one’s nerve.
The blue-chip FTSE100 index ended down 1.25% at 6,463 on Wednesday, having made early gains, before spending the session after 1000 BST in negative territory and sliding as the day’s fatigue wore out any optimists.
Time for some content. So far in July, the top-100 stocks have traded a range of 6,400 to 6,600 – enough volatility caused by the hope that the blue-chip stocks have sufficient non-UK and non-EU business to see them through what is proving to be an increasingly desperate market scenario following the UK’s surprise vote to quit the European Union.
On the more optimistic side, the FTSE100 has traded a higher range in the third quarter than the 6,100 to 6,400 range seen since mid-April and into the June 23 referendum run-up. In fact, looking more broadly, the spike on July 1 in London achieved the highest levels for the FTSE100 since August 2015 when debate about the looking referendum began.
The FTSE100 stocks are those more likely to have overseas interests, such as US subsidiaries, and therefore reap business from outside of the UK. So their relative optimism is something to monitor.
Sterling hit a fresh 31-year low of $1.28 on Wednesday and some analysts predict it will make history by reaching parity with the US currency at the end of this year or early in 2017.
But it might not all be doom and gloom even if no one really desires to see the domestic currency cheapening off.
While a weaker pound is a macro shocker, it could boost British companies’ competitiveness when they export to the United States, Canada and Asian countries which often mark prices and assets in dollars. These are the very nations that Britain may have to temporarily rely on more while European Union trade agreements get renegotiated.
It should be noted that the euro currency is also nursing downside right now, and the trading bloc was downgraded last week by one notch to AA by ratings agency Standard & Poor’s.
Furthermore, a weakening sterling could also help British companies with major investments in north America or in Asia. That is because translation of receipts from their US operations will deliver more sterling for their bucks. So the chief finance officers may have something from which to draw relief.
There were already some signs of this in the market on Wednesday.
Firstly, the top gainer in London today was Melrose Industries PLC (LON:MRO), up 45.8% to 597.5p. No mean feat, given as its main news of the day was a proposed takeover of US-based Nortek Inc (NASDAQ:NTK). Or rather, perhaps because it is a US company this cheered on UK-centric investors. Either way, the Nortek gained 39.25% to $87.02.
The acquisition of Nortek, Inc. and fully underwritten Rights Issue plans to raise gross proceeds of approximately GBP1.655bn.
This illustrates that any evidence of diversification by British companies is likely to be a winner.
On the flipside there is Walgreens Boots Alliance Inc (NASDAQ:WBA). As reported on Wednesday, the US group could take a hit from the EU referendum vote despite better-than-expected third quarter profits, analysts said.
Revenue and profit from the drug retailer’s international business, which includes Boots the Chemist in the UK, could face pressure if sterling keeps falling.
Walgreens made 11% of its revenue from mainland Europe and 9% from the UK in the 12 months to the end of August last year. Read more.
US service data lifted Wall Street markets on Wednesday. The Institute of Supple Management’s index of non-manufacturing activity jumped to 56.6 in June, up from 52.9 the previous month and topped economists’ expectations. Moreover, the report also showed strong improvement in the employment sub-index.
Although the strongest expansion in the ISM Services sector for seven months is welcome, the fact remains that the data is backward looking so it is premature to raise the flag and say the US economy will weather the UK Brexit fallout.
But assuming it does what the ISM suggests, this will only strengthen the greenback against sterling even more. Not only is the dollar rising because sterling is being pulled down; the dollar itself is rising because domestic data is pulling it up.
The net result is a continued depreciation in the UK currency and a boost to UK trade or UK investments in the USA.
Last week on a visit to the UK, US St Louis Federal Reserve President James Bullard told media that the United States will likely weather the Brexit fallout even if it is big news in Britain.
On the contrary, sterling might argue. Brexit could yet prove to be a bigger storm for the world’s biggest economy than for the UK.